Economic Sector

Last updated: Wednesday, January 23, 2019


Tax Hike Adversely Impacts Economy

Posted: Monday, May 28, 2018

In less than one year, the Ministry of Finance has thrice proposed amending tax laws with the aim of revising up various taxes such as environmental protection tax on petroleum products, value-added tax (VAT) and special consumption tax on many kinds of goods amid rising budget deficit and public debt, with especially fiscal revenue which become increasingly unsustainable in the context of new economic integration. These proposals are controversial and necessarily clarified reasons and impacts on the overall economy.

In the last five years, the most modified taxes are VAT, special consumption tax (excise tax) and corporate income tax. The Ministry of Finance has consulted on amendments to six tax laws since 2017, including value added tax, special consumption tax and personal income tax, Law on Environmental Protection Tax (the Government delayed the deadline for submitting until 2019) and consulted the draft of Law on Property Tax.

Professor Tran Tho Dat, Rector of the National Economics University, said that, with a stable economy, a relatively good macroeconomic background, a stable annual growth of over 7 per cent, it can be confirmed that Vietnam will enter the new growth trajectory. But, one of big macro variables are public debt and budget deficit. However, a policy must be viewed from multiple angles, particularly when the economy is moving faster to a modern market economy and the room for policy change is increasingly narrowing. To have a best policy, policy proposals must be multidimensional, broadly consulted and scientifically sound in order to recommend good policies right from the outset.

Mr Nguyen Van Phung, Director of Corporate Tax Administration Department under the General Department of Taxation, said, amended tax laws aim to build a consistent, fair and effective tax system that fits the socialist-oriented market economy, has reasonable incentives to facilitate domestic production and one of effective macroeconomic management tools of the Party and the State.

Currently, among six tax laws proposed for change by the Ministry of Finance, VAT is underlined because many goods are currently not subject to VAT or subject to five per cent. According to the proposal, VAT on many items will be raised to 6 per cent from 5 per cent and to 12 per cent from 10 per cent.

Dr Ngo Tri Long, former Director of the Institute of Price Studies under the Ministry of Finance, said, VAT (10 per cent) accounted 27.5 per cent of Vietnam's total budget revenue. Meanwhile, with a higher VAT rate, the European Union (EU) reported that VAT made up 21.4 per cent. Thus, the root of public debt and budget deficit in Vietnam is not grown from low tax revenue but rather because of corruption, loss, waste and weak financial discipline, wrong investment, or investment for group benefits, not for the community or for national development. If it cannot uproot the cause, no matter how we revise up the tax rate, e.g. to 12 per cent or a twofold rate, it is uncertain that the State budget is balanced. Looking from other perspective, increasing VAT will hurt and pressurise low-income people.

Dr Bui Trinh from Vietnam Institute for Research and Development (VISERI), said impacts of higher VAT and excise taxes on the economy are negative as it discourages production although the State Budget may get a little more at first but economic resources are shrinking in the medium and long term. In addition, the increase in indirect taxes may not affect 20 per cent of rich families but it made hardest hit to 20 per cent of the poorest. For that reason, instead of raising taxes, it is important to focus on avoiding tax losses and waste.

On property tax, Dr Hoang Van Cuong, Vice Rector of National Economics University, said that property tax is a common tax, applied in 174 out of 193 countries in the world. There are many different names for this kind of tax but it hard hit the real estate alike. The ground for proposing the property tax is not for increasing the fiscal income but the main goal is how to distribute and use this property in a reasonable way to ensure interests of the people.

Mr Dau Anh Tuan, Director of Legal Department under the Vietnam Chamber of Commerce and Industry (VCCI), said that he felt “dazzled” with tax hike proposals from the Ministry of Finance. We need to amend six laws to revise a tax. Seeking more fiscal income is very clear in tax revision proposals. “It is advisable to place the tax rise in a broader landscape where companies are increasing a lot of expenses for higher minimum wage and petroleum price hikes. If tax is still raised, it will have an immediate impact on business performance. Moreover, there are warnings that the cost growth is outpacing revenue growth. The competitiveness of SMEs will be thus alarming,” he said.

“We need to be very cautious with tax increases and we should approach the Resolution 07-NQ/TW on budget restructuring to reduce spending instead of just raising taxes. If we only use tax hike to restructure revenue, it will be hardly acceptable to the public. Consequently, it is necessary to put forward measures to control expenditures, save money, fight against tax arrears and reduce tax losses. Last but not least, there is a dire need for solutions to public spending, anticorruption, waste and prevention, and effective public investment,” said Dr Long.

Quynh Anh

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