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Economic Sector

Last updated: Wednesday, September 19, 2018


VAT Hike Proposal: The Poor Get Poorer

Posted: Friday, September 15, 2017

Ever-rising State budget deficit, tax revenue drops in many sources and other causes have made Vietnam's public debt reach an unseen high level. To counterbalance the shortfall, the Ministry of Finance recently proposed a VAT hike to the Government. This has drawn great attention of businesses and consumers.

Higher VAT rate proposal

Raising VAT means adding the tax value to goods and services in the process of production, circulation and consumption. As such, this will place pressure on businesses and consumers.

As proposed by the Ministry of Finance, the VAT rate on consumer goods will be raised from 10 per cent to 12 per cent from January 1, 2019. A lot of goods and services will be still subject to 10 per cent VAT like certain machinery, equipment, medical instruments, education and tap water. The rest will be taxed at 6 per cent.

The Ministry of Finance explained that the tax increase is in line with international practices. According to experiences in many countries in the world, including developed countries, in the face of rising public debt, they tend to restructure State budget revenues by increasing indirect taxes.

Many countries around the world already raised standard tax rates from 2009 to 2016, it said. The average tax in the European Union (EU) climbed from 19 per cent in 2000 to nearly 21.5 per cent in 2014. Meanwhile, OECD countries also opted for raising VAT, from 18 per cent in 2000 to roughly 19 per cent in 2014, and more than 19 per cent in 2016. The Ministry of Finance also points out that VAT is higher than 10 per cent in Southeast Asia, e.g. in Laos, Indonesia and Cambodia, which have a common tax rate of 17 per cent and the preferential rate of 13 per cent, even up to 15 per cent in the Philippines.

The Ministry of Finance said that this VAT change follows the enforcement of Law on VAT, which is facing certain problems. Accordingly, some VAT-free economic sectors such as machines and equipment used for agricultural production, fertilisers offshore fishing vessels have troubled enterprises and tax authorities.

With other economic sectors such as clean water, exhibition, physical training and sports, cultural activity, film production and art performance, VAT imposed is 5 per cent because they are already socialised. This has triggered unfair competition with other professions and industries levied 10 per cent of VAT.

The Ministry of Finance explained that a 5 per cent VAT applied to multi-purpose commodities such as rope to make fishing nets, fishing nets, specialised equipment and tools for teaching and research, and scientific experiments, results in enforcement inconsistency.

People suffer

The Ministry of Finance's VAT increase proposal has received negative feedback from the public as well as economic experts, because this duty is being applied to various kinds of essential goods and services such as food, travel, entertainment and medical treatment. Therefore, the tax hike will definitely affect prices of goods and services and affect people's lives and the economy as a whole.

Dr Vu Thanh Tu Anh, Director of Research at the Fulbright Economics Teaching Programme in Ho Chi Minh City, said we should think over the proposal of raising VAT on consumer goods, because VAT is generally regressive, which will affect people's lives, especially low-income earners. For the same product, consumers regardless of high or low incomes must pay the same tax rate. But low-income people have to spend a higher proportion of incomes for consumption, thus they are much more vulnerable. This is unacceptable in the angle of equality.

Dr Le Xuan Nghia, Head of the Business Development Institute (BDI), said that VAT is an indirect tax directly imposed on goods. This will increase goods prices, affect consumers and counter-impact enterprises. This will weaken corporate competitiveness as well.

A representative from a logistics business said that increasing VAT will push up input costs. Besides, freight and petrol prices have direct impact on the logistics industry. Currently, logistics costs in Vietnam account for about 25 per cent of GDP, while the rate is 10 - 13 per cent in other countries in the region and in the world. If VAT is revised up, it will push up logistics costs, forcing businesses to raise fees, and the competitiveness of Vietnamese goods will be lower than other countries.

Spending reduction instead of tax hike
Dr Nguyen Tri Hieu, a senior economist, said, increasing VAT will force people to spend less because of growing commodity prices, and their spending reduction means less goods consumption, businesses shrinking production and workers losing jobs. These are visible implications of VAT hike. This reality does more harm than good because the State gets more tax revenue in the short term but loses it in the longer term. When a business downsizes production, it will get less revenue. Subsequently, corporate tax incomes will fall.

The Ministry of Finance said that the tax increase will supplement the State budget, but it does not provide specific statistics to explain how raising VAT from 10 per cent at present to 12 per cent will affect the State budget and how people will be affected by it, he added.

VAT hike should be applied altogether. In case of necessity, it is advisable to consider revising up the current 5 per cent rate to have additional tax revenue, Hieu said.

Dr Vu Thanh Tu Anh said that the VAT share in Vietnam's total budget revenue is not low, even higher than EU countries, which are the highest VAT rates in the world. Thus, the VAT increase does not evidently improve the role of this tax in the total budget.

He noted that rising public debt and serious budget deficit in Vietnam are not caused by the failure of budget mobilization, but of budget spending efficiency. Currently, the share of State budget spending is very high (accounting for 28 - 29 per cent of GDP).

Hence, the solution to the root problem is reducing expenses rather than increasing revenues. It is obvious that VAT hike is a good temporary but unsustainable solution, and it harms people's livelihoods and economy. In the meantime, we can seek more fundamental solutions such as cutting recurrent expenditures and streamlining public administration, among others.

Si Son

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