VietNamNet Bridge – The Ministry of Finance’s (MOF) attempt to impose the 10 percent luxury tax on carbonated soft drinks is facing strong outcries from foreign manufacturers, who believe that the tax is unfair and aimed at them.

Why fizzy soft drinks?

MOF is attempting to put carbonated soft drinks onto the list of goods subject to Vietnam’s luxury tax. Explaining the proposal of a 10 percent tax, it said that the drinks contain industrial substances, including flavors, colorants and preservatives, which, according to experts, harm people’s health if overused.

Foreign-invested enterprises promptly made their displeasure known. Mark Gillin, Chair of Amcham, said at a workshop held last week that the taxation proposal was made based on vague scientific evidence and, moreover, “unhealthy” motives.

Gillin charged that the taxation aims at reducing the demand for carbonated beverages – mostly of which are sold by foreign manufacturers – and increasing demand for flat, non-carbonated drinks, mostly made by domestic enterprises.

Vehemently criticizing the MOF’s taxation attempt, he alleged that the intention of the policy is to confer a competitive advantage to domestic brands at the expense of foreign ones. Therefore, he insisted, this could be seen as a deliberate barrier to foreign investors.

However, MOF claims it has very good precedent for its action. The same products are being levied excise taxes in many other regional countries.

Thailand, for example, applies both a percentage and fixed tax rates on such products (20 percent plus 0.45 baht per 440cc). Cambodia taxes fizzy soft drinks at 10 percent and Laos 20 percent.

A report by MOF revealed that Vietnam consumed 925 million carbonated soft drinks in 2013. Noting that the average selling price is VND12.000 per liter, a 10 percent luxury tax would come to or VND1,200 per liter. Based on consumption rates, the state would be able to collect VND1.5 trillion more in luxury taxes by 2016 and VND1.9 trillion by 2018.

How’s the Vietnamese beverage market doing?

Analysts believe that no matter what action the MOF takes, the Vietnam beverage market will remain very attractive in the eyes of foreign investors. Coca-Cola and Pepsi currently hold 88 percent of the carbonated beverage market here, according to a report of the General Taxation Department.

All told, there are 134 foreign and domestic enterprises producing drinks in Vietnam. The carbonated soft drink market segment has proven to be largely inaccessible to Vietnamese manufacturers, who only offer a few unpopular products.

Meanwhile, Vietnamese do maintain superiority in the non-carbonated drink arena, with such beverages as tea, coffee and soybean.

Which scenario for the beverage industry?

MOF has not yet issued a reply to the attacks from AmCham. The ministry reportedly plans to submit its proposal to the government and put it into discussion at the upcoming National Assembly’s session, slated for May.

There are two possible scenarios for the carbonated beverage industry, once the luxury tax is applied. First, manufacturers would raise the selling prices to offset the tax. Second, they would keep prices stable, accepting lower margins on sales.

According to Dr Tran Kim Chung, Deputy Head of the Central Institute for Economic Management (CIEM), for every one percent increase in the price of carbonated soft drinks, demand will likely drop by 2.8 percent. He expects the 10% luxury tax, if and when implemented, to cost the industry $40.5 million in lost revenue per year.

If the second scenario holds, i.e., Pepsi and Coca-Cola do not raise their selling prices, analysts say it would not be any easier for domestic manufacturers to compete with foreign ones.

TBKTSG