VAT hike expected to bring $3.2 billion more to state budget

Rong Viet Securities estimates that if the new value added tax (VAT) policy is applied from 2019 with the tax rate increasing from 10 percent to 12 percent, the state budget would have VND70 trillion a year more from VAT collections.



The Ministry of Finance (MOF), however, has yet to release figures about this. The ministry, when proposing the tax hike, predicted that it would increase CPI by 0.06-0.39 percent, and would not have a big impact on the spending of low-income earners.

Commenting about the MOF explanation, Rong Viet’s researchers said due to the lack of transparency in the calculation method, they remain skeptical.

The researchers went on to say that what many economists are concerned about most is the influence of the VTA hike on families’ spending, income distribution and underground economic activities.

If VAT is high, thus leading to higher prices of goods and services, this will decrease people’s real income.

According to Euromonitor, a market analysis firm, though Vietnam has gained high economic growth rates in recent years, the majority of Vietnamese consumers will still be listed as low income earners.

However, not all products bear VAT (necessities for daily life, for example), while income will continue increasing and there will be additional support with new policies. Thus, Rong Viet researchers think the negative impact of the VAT hike on total demand and income distribution will be mitigated.

They believe the VAT hike would increase the size of the informal economy in Vietnam. The latest research works show that Vietnam’s underground economy amounted to 15.1 percent of GDP in 1991-2015. If the informal economy develops, GDP growth will be affected.

The VAT hike would bring medium-term benefits as it helps ease the budget deficit. In 2016, the VAT collection contributed 24.5 percent to the state budget revenue. If the new VAT policy is applied from 2019, the state budget would have VND70 trillion more.

As for the impact on the macroeconomy, the researchers said the tax increase may cause a higher inflation rate, lower demand and wider income inequality.

Meanwhile, HCM City Securities estimates that the tax hike would help the state budget have VND59 trillion more.

The MOF plan to raise VAT rate has not been applauded by economists though the ministry has affirmed that the poor won’t be affected by the decision.

Vu Thanh Tu Anh, research director of FETP, commented that MOF’s argument is unreasonable. “In theory, the poor reserve a higher proportion of their income for consumption than the rich. Hence, the VAT increase will hurt the poor more," he said.

The expert commented that to reduce the public debt and budget deficit, it is necessary to cut expenditures and improve spending efficiency.

M. Ha / vietnamnet