Diageo head takes on vice tax

Stephane Gripon, general manager of Diageo Vietnam

According to the draft law, the tax on alcohol above 20 per cent will be raised from 50 per cent to 65 per cent, while alcohol below 20 per cent will increase from 25 per cent to 35 per cent. If the bill is passed, what will be the impact on business?

We respect the role of taxes and support a framework that is simple, transparent and fair, and the one that strikes the right balance between the objectives of the government, the industry and consumers who choose to drink. The proposal increases are substantial and could have a significant impact on legitimate businesses like Diageo if not implemented in a reasonable way.

According to relevant authorities, 50 per cent to 60 per cent of imported spirits are brought into the country illegally and therefore evade taxes (such as import duties, special consumption tax (SCT) and VAT). We are concerned that excessive increases in the tax will only lead to widespread unrecorded and untaxed alcohol and this hurts the government, consumers, the public and the industry.

In detail, the tax increase will give more advantage to unrecorded alcohol and illegal importations. Government revenue will not be optimised from the revenue leakage that will inevitably result and the public and consumers that choose to drink will be more at risk from the proliferation of unrecorded consumption. Based on IWSR and WHO data analysis, these products are estimated to be more than 25 million 9-litre cases and are primarily home-made and illicit liquor. Compare this with branded local spirits which is just over four million cases and branded imported spirits which makes up almost one million cases. The opportunity to therefore expand the taxable base with the right tax and regulatory framework is significant.

What are of your opinions on a tax increase roadmap?

We strongly believe that any change to the investment environment and business operations should be carried out equally and consistently. If the government is of the view that they need to increase the SCT, implementation should be no earlier than January 1, 2016 and phased over the next three -four years, rather than a one-off change. Importantly, this should be done equally for all alcoholic beverages – beer, wines and spirits – over the same period of time. Alcohol is alcohol irrespective of the form it takes. Typical servings (standard servings) of beer, wines or spirits contain the same units of alcohol and impact the body the same way. Accordingly, all beverage alcohol should have the same tax change roadmap and there should be no discrimination between categories. We think the staged increase will help producers avoid unnecessary shocks and reconsider their employment and business development plans..

In your opinion, what are reasonable SCT policies for tackling the government’s concern and ensuring stable and sustainable business development?

We understand that taxes on beverage alcohol have a revenue-generating objective as well as a health policy objective. In setting the right tax regime, the best systems in the world have a simple, transparent and fair structure and reasonable rates. The simplest structure is a specific tax system based on alcohol content. It is simpler to administer and calculate, it is transparent, and it removes the risks of under-invoicing and other price manipulation options that come with ad-valorem/price-based systems.

As for reasonable rate levels, this is dependent on multiple factors but ultimately means generating optimal revenues for government, maximising compliance, while minimising non-tax paid activity in the form of trade fraud, tax evasion, smuggled alcohol and other illicit practices. This means the system should support compliant businesses and that the SCT levels are such that the end-consumer price should be within reach of adult consumers that have made an informed choice to drink alcohol.