State budget balance needed following VAT decision

The National Assembly (NA) last week, for the fourth time, adopted a resolution on the continued reduction of a 2 per cent VAT rate, valid from July 1 to December 31.

State budget balance needed following VAT decision, illustration photo/ Source: freepik.com

The move applies to many types of goods and services, but not for IT, telecommunications, financial activities, banking, securities, insurance, trading of real estate, metals, precast metal products, mining products, coke mining, refined oil, chemical products, and goods and services subject to excise taxes.

The NA has assigned the government to provide guidelines for carrying out the VAT reduction transparently and effectively.

VAT has been set at 8 per cent since early 2022 to boost certain segments of the economy. According to the Ministry of Finance (MoF), the rate provided businesses financial support of about $812.5 million in the first five months of this year. It is reported that the total VAT reduction was worth nearly $2 billion last year.

“The reduction policy has helped enterprises to reduce their prices,” said the MoF. “This has helped boost businesses’ performance and expand public consumption, and generate more employment. We have reached our goal of stimulating consumption and spurring production and business.”

According to Dutch-headquartered Global VAT Compliance BV (GVC), a reduced VAT rate on certain items increases consumption and encourages spending. This, in turn, can lead to job creation and boost the economy.

“For example, reduced VAT rates on construction services can encourage people to invest in home improvement projects, leading to an increase in economic activity in the construction sector,” GVC said.

“Additionally, reduced rates can also help small businesses. By reducing the tax rate on certain goods and services, the government can help these businesses remain competitive, especially against larger companies that have more resources at their disposal. Small businesses can also benefit from reduced VAT rates by attracting more customers and boosting their sales.”

However, the MoF also underlined that the reduction left a dent in state budget revenues.

It is estimated that there will be a decrease of about $1 billion in the second half this year, including $104.1 million a month from domestic revenues and more than $62.5 million a month from imports, the MoF reported.

The 2 per cent VAT reduction in the first half of this year caused a decline in state budget revenue of around $1.05 billion, or about $176 million a month. It is also estimated that over the second half of last year, the reduction resulted in a decrease of $107.6 million in the state revenues from domestic activities each month.

However, NA deputy Duong Khac Mai representing the Central Highlands of Dak Nong, has argued that though the VAT reduction can affect the state budget revenue, it plays an important role in supporting consumers and businesses, particularly those with low incomes or revenues.

“By reducing the tax rate on essential items and services, the government aims to make them more affordable and accessible for everyone, while also providing a boost to the economy,” Mai said. “It can help enterprises increase their recovery ability and expand production and business activities, then can make more contribution to the state budget.”

According to the MoF, in 2023, the total values of all policies on exempting, reducing, and extending payment of assorted taxes, fees, and charges, as well as rental for land and water surface reached about $8.33 billion, including exemption and reduction of $3.3 billion and extension of $5.04 billion.

Last year, extending payment of VAT, corporate income tax, and personal income tax, as well as land rental led to a reduction in the state budget revenue of an estimated $4.58 billion.

State budget revenues under pressure amid tough economy The state budget has recorded a deficit for the first time so far this year, largely caused by a rise in public investment disbursement, with a lower-than-expected state budget revenue due to difficulties across the economy.

Balancing act underway with state budget revenues Despite a state coffer surplus for most of the year, Vietnam is expected to see a deficit in the budget for the whole of 2023, with some fiscal initiatives on assisting businesses applied.