Increasing special consumption tax needs a reasonable roadmap

Deputy General Director of Deloitte Vietnam: Increasing special consumption tax needs a reasonable roadmap

It is necessary to conduct quantitative surveys and assessments with specific data on the impact of tax increases to make reasonable policy decisions, ensuring feasibility and effectiveness in the implementation of special consumption tax policies.

Workshop “Tax reform to promote business activities” organized by Investment Newspaper on the morning of August 14. (Photo: Chi Cuong)

"Laffer Curve" and the broader implications to consider

Sharing at the workshop “Tax amendment to promote business activities”, Mr. Bui Ngoc Tuan - Deputy General Director of Deloitte Vietnam Tax Consulting said that although the increase in special consumption tax (SCT) can help increase budget revenue, the increase is too fast and sudden, which can lead to unwanted consequences. The reason is that the tax increase can reduce the production scale of enterprises, leading to waste of production lines and invested equipment, as well as increase unemployment rate due to labor cuts.

The draft revised Law on Special Consumption Tax is being drafted by the Ministry of Finance, expected to be submitted to the National Assembly for comments at the 8th Session (October 2024) and approved at the 9th Session (May 2025). The current draft revised Law on Special Consumption Tax proposes to increase the special consumption tax rate by percentage for alcohol and beer products each year, with an increase of 15% - 35% compared to the special consumption tax rate of each product in this group according to current law.

“In addition to the narrowing of business production activities, the income of farmers growing other raw materials for beer and wine production will also be negatively affected, leading to a decline in related industries. In recent times, the beer and wine industry has also witnessed a decline in consumption due to the implementation of regulations on alcohol concentration when driving vehicles,” Mr. Tuan also pointed out the effects of tax policies on the overall economy.

In fact, there have been many similar cases. According to Mr. Tuan, the Laffer Curve principle and the theory of the relationship between tax rates and government tax revenue indicate that when taxes are increased too high beyond the critical point, the total government revenue will decrease. Some developed and developing countries have recorded negative impacts when the tax rate on alcoholic beverages exceeds the critical point such as the UK, Australia, Belgium, Thailand, Malaysia, leading to immediate serious deficits in the government budget.

Most recently, in 2023, when the UK government increased taxes on alcohol, it recorded a 20% drop in spirits sales, equivalent to a £108 million drop in tax revenue from spirits sales within 6 months. Accordingly, the UK government had to stop increasing taxes at the end of 2023 to deal with the decrease in tax revenue from alcoholic beverages. In 2015, Malaysia set a target of increasing tax revenue when it continuously introduced a policy of increasing excise tax on alcoholic beverages. However, the increase in tax rates did not help the country achieve its tax revenue target, but instead created a negative effect on the market, causing a loss of tax revenue, and at the same time causing many factories to close and many people to lose their jobs.

In addition to considering the overall impact on the economy, in the current context, Mr. Tuan said that businesses in the alcohol, beer and tobacco industries have reflected that the continuous increase in special consumption tax rates in recent years has caused great pressure, exceeding their ability to adapt. In particular, in the context of the unstable economic situation due to the prolonged impact of the COVID-19 pandemic and the global economic recession, the alcoholic beverage industry has been severely affected. Decreased consumption output, high operating costs, and disrupted supply chains have made the recovery process of businesses difficult. Further increases in special consumption tax rates during this period could worsen the situation, making it difficult for businesses to adapt, leading to the risk of bankruptcy or downsizing.

From observations, Mr. Tuan also said that consumers tend to switch to using smuggled, counterfeit, and illegally produced alcohol when the price of official alcohol increases due to increased excise tax, leading to further losses to the state budget, while people's health may be more negatively affected by using counterfeit or poor quality products. According to a WHO report, the rate of unofficial alcohol consumption in Vietnam in recent years has been around 60% of the total consumption. In other words, about 2/3 of alcohol consumption in Vietnam may come from smuggled sources or individual production.

Need a reasonable roadmap to give businesses enough time to adapt

According to the World Health Organization (WHO), beer and alcohol taxes in Vietnam only account for about 30% of retail prices, while in many countries, beer and alcohol taxes account for 40% - 85% of retail prices. This is also one of the reasons why the World Health Organization recommends that Vietnam should increase special consumption tax by at least 10% to reduce consumption, thereby controlling the harmful effects of beer and alcohol.

“Basically, we fully support the Drafting Committee’s decision to increase excise tax on goods that have negative impacts on health and the environment. However, the implementation of this policy also needs to be carefully considered from a socio-economic perspective, especially when considering feedback from businesses in the industry,” a representative from Deloitte emphasized.

At the same time, the application of relative tax (calculated by percentage), instead of absolute tax method, mixed tax calculation as noted the world development trend in the first draft, was also approved by experts from this auditing firm.

The reason is that the domestic beer market has up to 80% of the market share being popular and local beer, with a huge price difference compared to premium beer. The application of mixed tax and absolute tax at the present time will lead to unfairness in taxation when popular beer businesses have to pay more tax, the decrease in revenue indirectly affects social security, specifically the jobs of businesses in this 80% market share segment.

In addition, Mr. Tuan suggested that the drafting committee should closely coordinate with businesses and associations in conducting surveys and quantitative assessments with specific data on the impact of the draft on Vietnam's socio-economy. This will not only help make more reasonable policy decisions but also ensure feasibility and effectiveness in the implementation of the special consumption tax policy in the coming time. Based on the full impact assessment information, the drafting committee should consider proposing a lower special consumption tax rate than the current draft, in order to reduce financial pressure on businesses in the industry, especially in the current economic context with many challenges. The tax increase roadmap should be reasonably spaced with a longer roadmap for alcohol, beer and tobacco products so that businesses have enough time to adapt and adjust their business models accordingly.

Source: https://baodautu.vn/pho-tong-giam-doc-deloitte-viet-nam-tang-thue-tieu-thu-dac-biet-can-lo-trinh-hop-ly-d222379.html