The Ministry of Finance (MoF) is once again looking at raising the value added tax (VAT) rate from the current 10 per cent to 11 per cent in 2019 and then 12 per cent in 2020, after it issued a proposal in August last year calling for a 12 per cent rate starting next year.

The reason behind increasing the rate remains the same: Vietnam’s public debt is rising and increasing the VAT rate is in accordance with international norms, the ministry said in its draft proposal.

The average tax rate in EU countries was 19 per cent in 2000 and 21.5 per cent in 2014. It was 18 per cent in 2000 and 19 per cent in 2014 in OECD countries.

If the proposal was to be approved, Vietnam would have the second-highest VAT rate in Southeast Asia, after only the Philippines, which has a rate of 18 per cent.

The ministry last year asked to increase a number of different taxes and fees, including VAT, and its proposed 2 per cent VAT hike triggered heated debate among economists, policymakers, and businesses.

The ministry said the higher tax would make up for government revenue losses when Vietnam fulfils its commitment to cut import tariffs under free trade agreements and help tackle rising public debt, insisting that the current rate is too low.

However, some experts and analysts believe such an increase would have a negative impact on consumption and potential effects on growth. 

“Raising taxes may lead to lower private consumption and to lower growth in the short-term, which is counterproductive to the government’s immediate goals,” HSBC Economist Mr. Noelan Arbis told VET. “It also takes away from people’s disposable income, potentially lowering savings to finance future investments.”

Moving forward with tax reform is important for Vietnam to ensure sustainable growth and macroeconomic stability. But even if its gross revenue increases, many believe the country will not be able to balance its budget if the government cannot curb expenditure.

“Cutting wasteful spending and downsizing a bulky and ineffective bureaucracy are where the government’s eyes should be,” Mr. Nguyen Duc Thanh, Director of the Vietnam Institute for Economic and Policy Research, told VET. 

“Without reforms to reduce this outlay, Vietnam’s fiscal position is unlikely to improve.”

“Perhaps the most sustainable way to cut the debt-to-GDP ratio is to curtail government spending and its outsized role in the economy, but this may not be a short-term fix,” Mr. Arbis said. 

“For example, State-owned enterprise (SOE) equitization has become a bigger priority now that the government budget is under pressure, but there remain many challenges that suggest this may be more of a medium-term solution. Nevertheless, additional efforts to cut government spending should be seen as a positive sign, including reforming healthcare subsidies.”

The World Bank previously forecast that Vietnam’s public debt would climb to 64.4 per cent of GDP in 2017 and 64.7 per cent in 2018. 

The official result posted in late October showed debt of VND3,100 trillion ($136.5 billion), a rise of VND300 trillion ($13.2 billion) against last year, for 62.6 per cent of GDP, down 1 percentage point against 2016 and 2.2 percentage points lower than the target.

VN Economic Times