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A dispiriting tax plan
The Saigon Times Daily
Tuesday,  Aug 22, 2017,00:22 (GMT+7)

A dispiriting tax plan

The Saigon Times Daily

A tentative move put forth last week by the Ministry of Finance to raise the value-added tax from the current 10% to 12%, probably effective from January 1, 2019, has triggered grave concerns as it would leave adverse impacts on the poor, the corporate sector, and finally the country’s sustainable economic development as well as the State budget.

In giving an explanation of the VAT reform plan, Nguyen Dinh Thi, head of the Tax Policy Department under the ministry, says the current VAT rate of 10% is low and is not compatible with international practices, as most European countries are applying a tax rate of over 20%. The low VAT rate also fails to ensure the nation’s financial security, and when facing a high public debt, most advanced economies often resort to raising indirect taxes such as VAT, according to the tax official.

Such an argument by the taxman has been criticized as not well substantiated.

Vu Thanh Tu Anh of Fulbright Vietnam University points out that with the current rate of 10%, VAT already accounts for 27.5% of Vietnam’s total State budget, while in Europe, despite a high rate, the tax contributes only 21.4% of average budget revenues in European countries. The economist also stresses in Tuoi Tre newspaper that addressing the rising public debt requires measures to improve the efficiency of public spending rather than boosting tax revenues.

Meanwhile, tax revenues have already been standing at a higher proportion than most other countries, and any efforts to hike the tax to improve State budget revenues would deliver a hard blow to the public and enterprises.

If VAT should rise by two percentage points from early next year, all the people would find their incomes shrinking, and it is poor people who would feel the most impact as their incomes are mainly used for food and other necessities. Many might relapse into poverty, which is a setback for the Government’s drive to eradicate hunger and alleviate poverty that has been in place for over a decade now.

The more fearsome scenario, however, is a devastating impact on businesses.

A VAT spike would discourage consumption. Enterprises would therefore see their output shrinking as buyers would cut spending on expensive goods and services. The tax sums paid to the State would consequently tumble on a gradual basis, meaning the plan to increase State budget revenue would turn out to be a failure in the long run.

The Government has reiterated its stance to support enterprises as a way to nurture revenue sources for the State budget. While raising VAT can serve the purpose of spurring budget revenues in the short run, it would finally backfire, doing more harm than good for the State budget.

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