Shifting burden

It seem quite clear that those who can least afford it would be hit the hardest by any increase to VAT rates.

On a Sunday morning at Thai Ha market in Hanoi, Ms. Pham Thu Huong, a 28-year-old office worker picking up some food for her family, wondered what she could cut from her everyday spending if the government ratifies value added tax (VAT) increases. “I’m very concerned, as the increase would definitely affect our family’s monthly expenditure,” she said. “Our monthly income is just over $700, from which we have to pay regular living costs like electricity, water, internet, school fees and gasoline, which account for more than half of our total income.”

If the VAT rate is indeed raised from 10 to 12 per cent, Ms. Huong will have to fork out an additional $10-15 each month. “It’s not a huge amount but it adds up over a year and is significant for every household, especially given that low-income earners are the majority in the country,” Mr. Nguyen Tri Hieu, an economist, said.

Tightening belts

Mr. Nguyen Van Huynh, a technical worker with a garment company at the Tan Binh Industrial Zone in Ho Chi Minh City, agrees with Mr. Hieu. Both the rich and the poor must pay for basic necessities like electricity, water, milk for children, gasoline, and clothes, which would all be subject to the VAT hike. Workers and the poor already have a tough time, and now must pay more. “For rich people, a 2 per cent increase in VAT is nothing, but for poor people, the extra tax would cost a couple of meals for a family,” he said.

Many other low-income earners also expressed their opposition to any VAT increases. A World Bank report in 2015 found that Vietnam was still among lower middle-income countries despite GDP per capita increasing $57 compared to 2014. And according to the General Department of Taxation, Vietnamese people earning less than VND10 million ($440) per month account for 70 per cent of those paying personal income tax.

Among the debate, some local authorities have explained that VAT on many types of essential goods will not rise and so not affect living standards, and “will not lessen national consumption,” said Ms. Nguyen Thi Cuc, Chairwoman of the Tax Consultants’ Association. “This draft law is aimed at restructuring State budget revenue in the context of the country’s direct tax resources becoming lower,” she said.

Vat and total tax income Vs. gdp

Theoretically, all types of indirect taxes are regressive, so the level of impact will be dependent upon the types of goods and services people buy or use, according to Mr. Pham Dinh Thi, Director of MoF’s Tax Policy Department. “Vietnam as well as other countries has regulated that certain groups of goods and services are subject to no or low VAT tax rates, in order to diminish regression in indirect taxes,” he said. He added that a General Statistics Office report in 2014 on living standards revealed the lowest income group spent up to 59.6 per cent of their income on food and medical and educational services, while the highest income group spent 39.6 per cent.

However, what concerns Ms. Huong and Vietnamese consumers is that when VAT rates increase, every single item will rise in price. VAT targets end-users and the impact would be widespread because goods used to produce essential commodities will also increase in price, according to Mr. Hieu. Moreover low-income earners would have to spend a greater proportion of their income on essentials, raising their tax burden compared to earnings. “A VAT hike would make low-income earners more vulnerable,” he said.

Economist Mr. Le Dang Doanh, former President of the Central Institute for Economic Management (CIEM), said that raising the VAT rate would certainly make commodity prices higher, and local people would have to curb their consumption and reconsider daily spending. Figures from MoF, he said, are not persuasive, as tax policies generally accompany other measures such as social welfare, infrastructure, and education and should be calculated on people’s income levels, not on comparisons with other countries.

Side effects

The VAT hike is said to not only effect low-income earners but would also significantly affect the macroeconomy through severe impacts on national consumption. Many economists say that raising taxes is a bad sign for the economy, is it reveals a growing budget deficit. The government needs to bolster budget revenue, which will cause interest rates, production costs for businesses, commodity prices, and people’s spending to rise accordingly and leave a mark on economic growth.

Meanwhile, a representative from MoF insisted that increasing the VAT rate would have little impact on low-income households. According to estimates by the ministry, the VAT hike may push up the consumer price index (CPI) by 0.06-0.39 per cent, while it grew just 1.23 per cent in August compared to December last year and 3.35 per cent year-on-year, with core inflation in August rising 1.31 per cent year-on-year.

Nevertheless, a recent report from Viet Dragon Securities pointed out that there would be no significant impact on inflation, but due to the lack transparency in calculation methods it remains suspicious about the level of effect. At present, many Vietnamese economists are concerned about the impact of a VAT hike on household spending needs, income distribution, and implicit economic activities. “According to Euromonitor, although Vietnam has good economic growth, it is forecast that the majority of Vietnamese consumers will still be on low incomes until 2030,” the report noted. “Therefore, the VAT increase could make consumption weaken.”

A raft of economic experts also said that based on actual observations, a VAT increase would raise the size of Vietnam’s informal economy, which accounted for an average of 15.1 per cent of GDP between 1991 and 2015. If it develops strongly once more, GDP growth will be hit.

Compared to other developing countries in the region, Dr. Huynh The Du from the Fulbright Economics Teaching Program said, the tax burden in Vietnam is heavy and budget spending is huge. Budget revenue versus GDP in the 2006-2012 period was 22.6 per cent, compared to Thailand’s 16.31 per cent, Malaysia’s 14.79 per cent, and Indonesia’s 12 per cent, while being lower than Japan’s.

Budget expenditure versus GDP in 2016, Mr. Du went on, was 28.3 per cent; higher than regional countries. “This shows that a heavy tax burden has impacted significantly on people, businesses, and the competitiveness of the economy,” he said. “For enterprises with low competitiveness, the tax increase will add to their problems.”

Mr. Le Xuan Nghia, Director of the Institute for Business Development Studies, said that any increase to VAT would push up prices and reduce the competitiveness of enterprises. “Many countries around the world have limited indirect taxes, some at 10 per cent, some with 5 per cent,” he said. “Raising the VAT would hit the poor.”

He added that it is important to improve the country’s business investment environment so that enterprises can expand production. From there, it would be possible to grow budget revenue without raising taxes. At the same time, expenditure must be curbed. “If both of these were done in parallel, the State budget would increase without higher taxes,” he said.

Although there would be adverse effects on the economy, according to some experts, the increase in VAT could provide medium-term benefits in reducing the budget deficit. In 2016, VAT contributed 24.5 per cent to State budget revenue. If the new tax policy was to be introduced in 2019, more than $3.08 billion (VND70 trillion) in additional revenue would flow into the State budget. “This is a huge number compared to the size of the budget deficit target in the 2016-2018 period,” the Viet Dragon report noted.

Assessments of the impact from a VAT increase on the macroeconomy have many aspects to consider, according to Viet Dragon, as increasing VAT can lead to higher inflation, falling aggregate demand, and acceleration income inequality. Increasing VAT rates is seen as part of fiscal tightening policies, so policy makers need to come up with additional policies to see the change passed by the National Assembly next year.

by Khanh Chi & Quynh Nguyen / VET