Weighing up the pros and cons of the ‘vice tax’ rise

Daniel A. Witt, president of Washington DC-based International Tax and Investment Centre (ITIC)

The National Assembly Standing Committee has just agreed to an average annual 5 per cent increase in special consumption tax (SCT) for cigarettes, beer and wine over the next few years. What effect will this tax rise have on businesses and consumers when the SCT is applied?

Gradual increases from 2015 through to 2017 for tobacco and 2018 for beer are essential in helping to off-set the risk of creating a tax shock that can increase smuggling and illicit trade. International experiences demonstrate that greater levels of smuggling and illicit trade have reduced the capacity to raise excise revenues. This is particularly relevant within economic communities, with greater trade facilitation across already-porous borders.

However, it is essential that incremental and gradual increases to the SCT rate of 5 per cent per year are applied across the board to all excise tax categories. Higher-up front SCT increases (greater than 5 per cent) on other products risk a tax shock that can have impacts across the market. For example, a higher up-front increase for the SCT on wine and spirit products may risk incentivising smuggling and shifting consumption of these products to the black market. Consumers are price-sensitive and tend to substitute consumption to other products that have not experienced the large tax increase. All alcohol beverages should be treated the same. Once entered into the market, black market trade can endure beyond the point that the various rate increases even out over time, which is a long-term risk to government revenue.

We are concerned about reports that the SCT for wine and spirits is expected to be subject to a one-off 10 per cent increase from existing rates of 25 per cent (for beverages below 20° abv) and 50 per cent (for beverages above 50° abv). Such an increase in 2016 would represent immediate increases of 20 per cent and 40 per cent respectably to the excise tax payable for these categories. Such increases risk a tax shock that can distort the market and impact the ability to collect excise revenue. This 10 per cent increase is too high and should be set at just 5 per cent, the same increase proposed for beer. Again, all products should have the same, gradual tax increase. Vietnam policy makers can avoid creating a tax shock by utilising a gradual 5 per cent, multi-year approach across all products when increasing the SCT. Such an approach should also avoid destabilising legal markets and increasing black market trade including illegal cross-border smuggling.

As a guiding principle, tax policy and rates should be competitively neutral. With this in mind, policy makers should avoid increasing the differential between alcohol product categories. SCT policy should also enable predictable and stable budget revenues by preventing substitution and down-trading by consumers.

Does ITIC have any experience in advising nations on the imposition of the SCT?

ITIC has served as a clearinghouse for information on the best practices in taxation and investment policy since 1993. We have also acted as a training centre to transfer such know-how for business development and economic prosperity. Over 85 countries have participated in ITIC programmes. ITIC is a leading expert on indirect taxation, including excises. ITIC, in conjunction with Oxford Economics, have conducted excise tax studies in over 40 countries. The views we are sharing with the Vietnamese officials are based on best practices and experiences of both developing and advanced economies.

We have worked with the Vietnamese government on its tax policy. ITIC’s fist workshop in Hanoi was in 1996. We encourage Vietnam and other countries in the region to ensure that its tax policy is in line with international best practice. Policy makers should take great caution when deciding to impose new taxes, or increase existing taxes, on products as the new measure will directly affect enterprises, consumers and the whole market without due consideration of unintended consequences to market behaviour.

Across the world, consultation by governments with key stakeholders including producers, enterprise associations and even consumers is essential before deciding to raise taxes or not. Such interaction is outside the scope of ITIC’s work. But in many nations, consultation should be conducted so that the levied taxes can harmonise the benefits of the government, enterprises and consumers. Tax is one of the tools that the government can use to regulate the market. However, tax will produce no desired results if it is used improperly.

How can Vietnam use the SCT to ensure all side benefit?

As I’ve said, disproportionate or inequitable increases in taxes including the SCT will lead to increases in operational costs for businesses and consumers. Vietnam must balance the benefit of the government (revenue), enterprises (profit), consumers and the environment against each other. Vietnam’s economy is in a transitional stage so any plan on tax increases must be carefully considered before it is realised. Comparisons of product categories must be made to ensure the application of neutral tax adjustments. When you increase tax on a particular product category, this will naturally flow through to higher retail prices. This may increase consumption of similar, cheaper products and risk the trade shifting to the black market.

It is important that policy makers determine an appropriate SCT rate for alcohol beverages, which is commensurate with market conditions in Vietnam. Getting this right, and preventing prohibitive rates set too high, is a critical step in preventing a rise in illicit trade, which is a growing problem across Southeast Asia.

Do you think that any increase in the SCT for any item will need a roadmap?

A roadmap is necessary because it will help enterprises and consumers avoid tax shocks and will provide stability and predictability for government revenues. As I’ve said, the government should utilise a gradual, multi-year approach across all products when increasing the SCT. It’s good for all parties, providing industry and consumers with the ability to plan and adjust as necessary.

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