Tax increases could have negative impact on economy

MOF has proposed increasing the rate from 10% to 12%, beginning in January 1, 2019, and to 14% from January 1, 2021.

It has also proposed lowering the CIT on SMEs to 15%, to be applied to businesses with revenue of less than VND3 billion a year. Businesses with annual turnover of VND3-50 billion would be taxed 17%.

Nguyen Khac Quoc Bao from the HCM City Economics University warned that the tax hike may lead to unforeseen consequences. 

In general, when the state raises tax rates, this indicates a budget deficit, which forces the government to seek new sources of revenue.  

The tax hikes would bring about interest rate increases and cause enterprises’ production costs to climb higher. 

Once the goods prices increase, people would have to spend more money on goods and services.

He said that the tax increase would have a big impact on the State Bank’s monetary policy. Once the central bank pumps more money into circulation, this will increase the inflation rate. 

Bao went on to say that if MOF finds it necessary to raise tax rates, it needs to provide enough information to the public. The plan to raise tax rates would be supported if the money is used for projects to serve social security.

“It is necessary for MOF to say how much more money the state budget would receive from the tax hike and what purposes the money would be used for. It also needs to clarify how many SMEs would benefit from the CIT rate reduction,” he said.

“The incident at the Cai Lay BOT fee collection station recently raised complaints about transportation costs. And now the MOF’s proposal on tax hikes will surely affect the living costs of many people,” Bao said.

An official of the HCM City Taxation Agency who asked to be anonymous thinks the tax hike would face opposition.

“Other regional countries apply a 5-7% VAT rate only to stimulate demand. If Vietnam raises the VAT rate to 12%, people would have to spend more to buy goods,” he said.

“This won’t help stimulate demand, especially in the context of an economic growth slowdown, low income and low demand,” he warned.

He said that foreign investors pour capital into countries with high CPI. Therefore, the VAT increase may be a barrier to both economic growth and FDI attraction.