A recently-announced tax reform proposal from the Ministry of Finance (MoF) will result in both revenue losses and gains, with State budget revenue to improve rapidly in the near term thanks to the high tax base from value-added tax (VAT) and environmental protection tax payments, RongViet Securities wrote in a September report.

The tax hikes, including two drafts on amending and supplementing the Law on Environmental Protection Tax and the current laws on five types of tax - VAT, special sales tax, corporate income tax, personal income tax, and natural resources tax - is the latest solution the MoF has come up to tackle rising public debt and State budget losses.

These types of taxes contribute about 62 per cent of State budget revenue, while the remainder comes from import-export taxes, fees, and other income. 

The VAT increase from the current 10 per cent to 12 per cent, which is up for discussion at the National Assembly in 2018 and would take effect on January 1, 2019, has created fierce debate about “fairness” and the burden on households, especially low-income earners.

According to MoF, the main reasons for raising VAT are to balance the State budget and cut public debt. 

The ministry said that the current VAT rate is too low compared to “international practice”, so raising it would kill two birds with one stone: balancing the State budget and playing by global rules.

Many economists are concerned about the effects of VAT increases on household demand, the distribution of income, and the shadow economy. 

If higher VAT feeds through into higher prices, it will prompt a fall in real budget revenue. 

Despite Vietnam’s strong economic growth, Euromonitor believes that the majority of Vietnamese consumers will still belong to the low-income segment by 2030.

However, because not all products are subject to VAT, for example necessities, rising budget revenue will continue and a change in VAT will not be introduced in isolation. 

“We think the net negative effects of VAT on aggregate demand and the distribution of income could be softened partly,” the report said, adding that based on its practical observations, the rise in VAT is expected to boost the size of the shadow economy in Vietnam.

RongViet’s estimates suggest that the VAT increase could create the medium-term benefit of reducing the fiscal deficit. 

With VAT contributing 24.5 per cent to budget revenue in 2016, budget revenue could be bolstered by VND70 trillion ($3.08 billion) if the new tax is applied in 2019. 

This is a substantial amount compared to the size of the budget deficit target during the 2016-2018 period.

“A rise in VAT, considered part of fiscal tightening policy, could cause higher inflation, reduced aggregate demand, and increased income inequality,” the report noted. 

“These deteriorations will happen at the expense of an improved government budget. We think the government needs to provide supplementary policies in order to help this change pass through the NA in 2018.”

Key changes to VAT

An increase to the current standard VAT rate of 10 per cent to 12 per cent from January 1, 2019, or 12 per cent from January 1, 2019 and then 14 per cent from January 1, 2021.

The draft law removes a number of goods/services subject to the 5 per cent VAT rate, moving them to the standard tax rate (water, medical and educational equipment used for multiple purposes, sporting and entertaining activities, and books).

The 5 per cent VAT rate is to increase to 6 per cent from January 1, 2019.

Transfer of land use rights is to be changed from VAT exempt to taxable at the standard VAT rate.

Fertilizers, agricultural machinery, and offshore fishing boats to change from VAT exempt to taxable at 5 per cent VAT or the standard VAT rate.

Tax refunds to be brought back for enterprises manufacturing goods or providing services subject to the 6 per cent VAT rate. The threshold for payment by banks for both VAT and CIT purposes is to be reduced from VND20 million ($880) to VND10 million ($440).

VN Economic Times