Vietnam’s pepper and spice sector is highlighting serious VAT imbalances, as businesses receive more than $2.1 billion in tax refunds while contributing only a fraction in actual tax. Industry leaders are calling for urgent reforms.

Massive refunds raise concerns over tax efficiency and fairness

The Vietnam Pepper and Spice Association (VPSA) has submitted a formal petition to the Office of the Government, the National Assembly Office, and relevant ministries to review VAT policies applied to the pepper and spice industry.

According to VPSA, Vietnam produces around 200,000 tons of pepper annually, of which 95% is exported and only 5% consumed domestically. Of that 5%, just 5,000 tons undergo deep processing for local use, which is the only volume subjected to VAT collection. The rest, being exported, qualifies for full VAT refund under existing regulations.

With 2024 export turnover for the pepper sector hitting $1.3 billion, the industry’s VAT footprint is disproportionately skewed. Just about $1.63 million (42 billion VND) is collected in VAT from domestic sales, while refunds to exporters amount to approximately $63.375 million (over 1.6 trillion VND).

A similar situation applies to other spices, with total exports also around 200,000 tons but only a small amount processed for local sale. Altogether, the Vietnamese spice sector exported over 400,000 tons in 2024, generating just 55 billion VND ($2.2 million) in VAT revenue while companies received an estimated 2.135 trillion VND ($83.6 million) in refunds.

VPSA noted that although domestic VAT is fully collected, the VAT refund process for exports remains vulnerable to fraud, creating risks for compliant businesses and undermining transparency in tax administration. These vulnerabilities, VPSA warned, could worsen under the upcoming amendments to Vietnam’s VAT law.

Proposed reforms: 0% VAT and fixed-rate export tax

To address these issues, VPSA proposed a new VAT model. For inputs used in export production, the association recommends applying a 0% VAT rate and eliminating refund mechanisms altogether.

Instead, VPSA suggests imposing a flat 0.5% export tax on pepper and spices. This approach would ensure immediate revenue collection, streamline procedures, and eliminate refund delays that often disrupt businesses’ cash flow.

For products consumed domestically, VPSA supports maintaining the current 5% VAT rate on input materials.

The association believes that the current VAT structure poses financial burdens on exporters, especially in a volatile global market with strong competitors like Indonesia, India, and Brazil. Vietnamese firms mostly export semi-processed goods, yielding slim margins of just 1-3%. The existing refund mechanism, therefore, becomes a barrier to sustainable growth.

The proposed tax reforms, VPSA argues, will create a more transparent and efficient system, encourage compliance, and help the spice industry thrive.

While awaiting formal evaluation of its proposals, VPSA has also requested that the Ministry of Finance recommend delaying the enforcement of the new VAT law beyond the scheduled date of July 1, 2025.

Tam An