An increase of VAT does not have a major impact on low-income people

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Mr. Pham Dinh Thi answers questions from the press.

Proposal to raise VAT will make the poor and low-income people more burdened, what do you think about this?

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

In order to reduce the recurrence of indirect taxes, countries in the world, including Vietnam, regulate some groups of goods and services not subject to VAT or subject to VAT but at a preferential tax rate (lower than the ordinary tax rate) to reduce the tax burden for low-income people.

According to the Law on VAT, there are 25 groups of goods and services not subject to tax and 15 groups of goods and services subject to VAT at a preferential tax rate of 5%.

Based on the results of the survey conducted by the General Statistics Office of Vietnam in 2014, the Ministry of Finance found that for the lowest income group, 59.6% of income was spent on food, health, education. In contrast, the highest income group spent only 39.6% of their total income on these goods and services. These goods and services are not subject to VAT, the adjustment of the VAT rate increase will not affect the expenditure of this group for goods and services.

Thus, an increase of VAT rate from 10% to 12% has little impact on low-income households, however, for low-income vulnerable households, there is a need for social and welfare support measures such as education, health, infrastructure, etc. to benefit the poor.

At present, the Government issue policies such as subsidizing electricity for poor households and social policies 49,000 VND per month; support to build houses for poor households and social policy households; support for single people, elderly people in poor households and elderly people without social insurance, disabled people at a level from 180,000 to 720,000 VND per month; issue policy support to participate in health insurance for the poor, children under 6, students; provide free tuition fees for ethnic minority students from poor households studying in vocational education and higher education institutions.

The proportion of VAT on total taxes and charges in Vietnam is high, even higher for some European countries, although they have higher VAT rates than Vietnam. So, does the Ministry of Finance consider the experience of other countries to compare to Vietnam whether it is appropriate or not, Sir?

In the region, the VAT rate of some countries may be lower than Vietnam, but the rate of collection of consumption taxes, including VAT on total State budget revenue is higher. Specifically, in Vietnam, the proportion of goods and services taxes in 2016 accounted for 47.5% of total State budget revenue, lower than Thailand (53.9%), Laos (55.9%), Cambodia (55.5%) and the Philippines (45.6%).

For some European countries, although the VAT rate is high, the total revenue from VAT out of total budget revenue may be lower or equivalent to Vietnam as reported in the past. According to the study, the Ministry of Finance found that the determination of the share of VAT revenues in total state budget revenue depends on many factors from the structure of the tax system of other countries, the level of regulation of other taxes in the system.

According to the analysis, the total revenue from VAT out of total revenue may be lower or equivalent to Vietnam but the total revenue from taxes and fees of these countries is higher. For example, Denmark collects VAT of 19.24%, but total tax and fee collection accounts for 49.9%; these rates in Ireland are respectively 20.47% and 29.8%; 18.37% and 38.1% in Germany; 18.45% and 33.6% in Spain; 20.73% and 25.37% in the UK respectively.

Meanwhile, in Vietnam, although the total VAT is 24.5% of total revenue, the total revenue from taxes and fees in 2016 only accounts for about 21% of GDP.

Does the proposed VAT increase affect the inflation rate, Sir?

In this regard, the World Bank also has the following assessment: International experience shows that the impact of increasing the VAT rate on inflation is relatively limited.

The current VAT increase proposal will lead to an increase in the CPI between 0.06 and 0.39%. Thus, unless the government loosens monetary policy or an unusual salary increase coincides with the VAT increase period, inflation will increase. Vietnam's current inflation and in the future is expected to remain low, so 2019 is a good time to implement tax reform.

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The Ministry of Finance has already assessed the impact on inflation of the revised proposal on VAT. However, because the cost of inputs has always fluctuated, import tariffs have been reduced as committed, so the Ministry of Finance will continue to work with the World Bank to make analytical work and details on this content.