Vietnam: Why Not Reduce VAT In Vietnam By More Than 2% From July To The End Of 2023?

In recent months, the Vietnamese National Assembly, Government, and relevant ministries and agencies have held multiple discussions regarding the decision to issue a decree reducing VAT by 2%, bringing it down to 8% like Decree No. 15/2022/ND-CP issued by the Government earlier in 2022, reducing VAT until the end of 2022.

The Vietnamese National Assembly has agreed to implement the policy of reducing value-added tax to 8% from July 2023. In May 2023, the Secretary-General of the National Assembly issued Announcement No. 2298/TB-TTKQH regarding the conclusions of the Standing Committee of the National Assembly on the Resolution of the National Assembly regarding the reduction of value-added tax.

Accordingly, the Standing Committee of the National Assembly has agreed to supplement the National Assembly's resolution on reducing value-added tax to the 5th session of the National Assembly for consideration and decision-making in an expedited procedure. This content will be incorporated into the general resolution of the National Assembly's session.

According to Resolution No. 43/2022/QH15, the VAT rate for goods and services currently subject to a 10% tax rate will be reduced to 8%. However, certain groups of goods and services such as financial activities, banking, securities, insurance, telecommunications, information technology, and real estate business will not be eligible for the tax reduction.

It can be seen that the reduction in VAT will not be applied to all groups of goods and services, which will create significant difficulties for the accounting and auditing departments of enterprises due to the intermingling and interdependence of various business types.

Reducing taxes for specific products or sectors without applying it to other goods can create challenges for businesses, especially those operating in multiple sectors, trading various types of goods, and having liabilities in different areas.

This perspective has been demonstrated throughout 2022 when Decree No. 15/2022/ND-CP also only reduced VAT by 2% for specific groups of goods and services.

Why not reduce VAT by more than 2%?

Reducing VAT by more than 2% can have significant potential impacts. Firstly, excessive reduction in VAT will decrease the revenue of the state budget, creating a gap in the government's financial resources. This can affect the ability of the Vietnamese government to provide essential public services and invest in critical areas such as healthcare, education, and infrastructure.

Moreover, excessive reduction in VAT can lead to budget imbalances when government spending is not adjusted accordingly. This can result in debt repayment issues for the country and economic instability.

Furthermore, reducing VAT by more than the appropriate level can lead to increased money circulation in the market. If the increased money circulation is not carefully managed, it can lead to rapid inflation, especially when essential items such as food and commodities are subject to reduced VAT. Inflation will increase prices and reduce the purchasing power of consumers, negatively impacting the economy and people's daily lives.

Every year, Vietnam struggles to maintain inflation within a stable range, with a target of around 4% compared to the previous year. If this figure is exceeded, the economy may face unpredictable fluctuations. Due to the fear of inflation, the United States, as a leading global country, has raised interest rates multiple times since 2022 to cope with inflation.

In conclusion, reducing VAT by more than 2% can have various negative effects such as reduced government spending, increased inflation, budget imbalances, and other potential economic challenges. Therefore, when implementing VAT reduction policies, careful consideration and balanced adjustments are necessary to avoid undesired consequences. As a result, proposals to reduce VAT by 4% in 2023 were quickly eliminated, even though Vietnam is currently facing a low deflation status.

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