Phạm Đình Thi, director of the Ministry of Finance’s Tax Policy Department talks with a Vietnam News Agency reporter about the ministry’s proposal to increase value added tax (VAT) from 10 to 12 per cent.

Can you explain why the Ministry of Finance has proposed an increase in the VAT rate?

Việt Nam’s tax-to-GDP ratio has been declining over recent years. Specifically, the ratio fell from 23.5 per cent in 2010 to 21 per cent in 2016. The decrease was mainly due to a fall in crude oil, import tax and corporate income tax revenues.

Import tax has decreased gradually due to the implementation of tariff reduction commitments signed by Việt Nam under trade agreements, and the corporate income tax rate was also reduced from 32 to 20 per cent to increase the competitiveness of the economy.

These changes are good for the economy as a whole as they have helped stimulate investment, growth and employment, but were also partly responsible for a growing State budget deficit, leading to an increase in public debt.

Studying the experience of other countries, the Ministry of Finance found that as public debt rises, countries tend to restructure State budget revenue streams in the direction of expanding revenue from indirect and consumption taxes to solve the imbalance.

For example, EU countries had an average tax rate of 19 per cent in 2010 and 21.5 per cent in 2014. Members of the Organisation for Economic Co-operation and Development (OECD) have an average tax rate of 18 per cent in 2000 and 19 per cent in 2014.

Compared with VAT rates in some countries, the rate Việt Nam is imposing is low. The average tariff in Africa is 16.4 per cent, Asia 10.9 per cent, the EU 19.8 per cent, Central Europe and Russia 18.6 per cent, the US is 14 per cent, and the average global VAT is 16 per cent.

VAT rates are particularly high in countries such as Norway, the Czech Republic, Finland and Argentina (more than 20 per cent). Among Asian countries, the Philippines is applying a tax rate of 12 per cent, Sri Lanka 12.5 per cent, Mongolia 13 per cent, Bangladesh 15 per cent, and China 17 per cent. India has just introduced a Goods and Services Tax of 20 per cent or higher.

Against this backdrop, the proposal to raise the tax rate from 10 to 12 per cent is necessary.

Many people have raised concerns that the increase in VAT would hit the poor hardest. Do you agree?

Theoretically, indirect taxes are cumulative in nature, but the degree of impact depends also on the goods and services that consumers use.

To reduce the tax burden for low income people, countries including Việt Nam regulate certain groups of goods and services not subject to VAT, or subject to VAT but at a preferential rate (lower than the ordinary tax rate).

According to the Law on Value Added Tax, there are 25 groups of goods and services not subject to tax; including groups of goods and services essential for the needs of people such as food, foodstuff, health, education and 15 groups of goods and services subject to VAT at a preferential rate of 5 per cent.

Based on the results of the living standards survey conducted by the General Statistics Office of Việt Nam in 2014, the ministry found that for the lowest income group, 59.6 per cent of their income was spent on food, foodstuff, health, and education. In contrast, the highest income group spent only 39.6 per cent of their total income on these goods and services. These goods and services are not subject to VAT, so the VAT adjustment will not affect people’s expenditure on such items.

Thus, increasing the VAT rate to 12 per cent will not have a major impact on low-income households. However, low-income households can be vulnerable, and still need support to ensure social security.

The proportion of VAT in Việt Nam’s total tax and fee collection is high, even more so than some European countries, although these countries have higher VAT rates than Việt Nam. So is it appropriate when the ministry refers to the experience of other countries to propose a tax hike?

In the region, the VAT rate of some countries may be lower than that of Việt Nam but the proportion of tax revenue from consumption taxes, including VAT, in total State budget collection is higher.

Specifically, in Việt Nam the proportion of goods and services taxes in 2016 accounted for about 47.5 per cent of total State budget revenue, lower than Thailand (53.9 per cent), Laos (55.9 per cent), Cambodia (55.5 per cent) and the Philippines (45.6 per cent).

For some European countries, although the VAT rate is high, the proportion of VAT revenue in total State budget revenue may be lower or equivalent to that of Việt Nam as reported recently.

However, MoF’s study shows the proportion of revenue from taxes and fees in the GDP of these countries is higher. For example, Denmark’s share of VAT in total tax revenues is 19.24 per cent, but total tax revenue accounts for 49.9 per cent of GDP; Germany is 18.37 per cent and 38.1 per cent; Spain 18.45 per cent and 33.6 per cent; Britain 20.73 per cent and 25.37 per cent, respectively.

Meanwhile, in Việt Nam, although the total VAT revenue accounted for 24.5 per cent of total State budget revenue, the tax-to-GDP ratio in 2016 was only about 21 per cent.

Will the VAT hike affect inflation?

In this regard, the World Bank has also commented that international experience shows that increasing the VAT rate has little impact on inflation.

The VAT increase might lead to a one-time rise in the CPI by between 0.06 and 0.39 percentage points. Thus, unless the Government loosens monetary policy or abnormally raise wages, and increase the VAT rate at the same time, inflation will actually jump up.

The ministry will continue working with the World Bank to analyse the impact of the VAT rate hike.

According to you, is it appropriate to increase value added tax in 2019 as proposed by the Ministry of Finance?

The cycle of world economic development is simulated in sinusoidal form. The world economy is recovering in the cycle of development and Việt Nam is not outside the cycle.

Việt Nam’s current inflation is forecast to remain low in the future. Besides, the prices of petroleum and input materials such as iron and steel are low, so 2019 is a good time to implement the tax reform.

Việt Nam, as well as some countries that are in the process of deep integration, tends to restructure revenue and gradually increase the proportion of indirect taxes when import taxes are cut sharply.

The country’s import tariffs will fall when it realises the commitments of 11 FTAs, thus it is necessary to restructure the economy and the State budget. Therefore, I think 2019 is an appropriate time to increase the VAT rate. — VNS

The poor would suffer the most from a VAT hike

Lê Xuân Nghĩa, former chairman of the National Financial Supervisory Committee, said to the Đầu tư (Investment) newspaper that the VAT rate hike would have an effect on all consumers, but especially the poor because most of their income is used to buy essential goods, thus they would suffer more than the rich who spend just a part of their income on daily provisions.

In principle, when a tax is raised, prices of goods will also increase. However, whether the aggregate demand is affected or not depends on the price elasticity of demand for each product. 

The consumption goods are inelastic, meaning that despite large changes in price, the amount of demand for the goods will not change much. But industrial goods such as home appliances are very responsive to price fluctuations, thus a small increase in price would be accompanied by a large decrease in demand.

In 2014, when Japan increased its VAT from 5 per cent to 8 per cent, consumption demand slumped, causing the economy to fall into deflation. Since then, the Government has delayed its plan to increase consumption taxes many times. Instead, it has to take other drastic measures to stimulate demand. This shows that people are very sensitive to tax changes.

However, the Ministry of Finance is under pressure to balance the State budget amidst shrinking sources of budget revenue and increasing regular expenses. The expenditure is increasing at a rate higher than GDP growth.

The best solution to the problem is cutting public spending and improving the efficiency of public spending, which will require efforts by not only the ministry. — VNS