VAT reduction helps economic recovery

Reducing the VAT (value added tax) by 2% has been the most practical solution to stimulate consumption and production.

The General Department of Taxation (GDT) has gained ‘excellent and comprehensive’ achievements with the state budget collection of VND1.692 trillion, or 20% higher than estimates, and VND78 trillion higher than the figure in 2022 as reported to the National Assembly.

The budget collections are higher than estimates because this has happened regularly in recent years. The noteworthy thing is that the proportion of revenue from domestic sources has been increasing, reaching 85%, which shows the strength of the economy.

However, the mobilization rate to the state budget is high, at 18% of GDP (gross domestic product), higher than the targeted 15.2% of GDP. The figure is high at a time when enterprises, the public and the economy have been facing difficulties over the last three years.

Vietnam has applied a reasonable fiscal policy to help people and enterprises ease difficulties because of the pandemic, with VND233.5 trillion total value of taxes, land rent, fees and charges reduced in a campaign which is the largest one in the history of the financial sector.

However, the amount includes VND135 trillion of tax payment delay. In other words, enterprises and people will still have to pay the taxes.

Enterprises and people can only enjoy a tax cut and reduction of VND98.5 trillion.

The most considerable support is the 2% VAT reduction policy, under which VND51.4 trillion has been cut or reduced to stimulate production and consumption. Analysts say that this was the fastest, most direct and effective support package among the state-initiated packages so far.

Policymakers once were worried that the VAT reduction from 10% to 8% would lead to a decrease in tax collections to the state budget in the short term.

However, this did not occur. Figures show positive influences of the VAT reduction to the economy. All enterprises, the public and the state benefited from the policy.

The 2% VAT cut was seen as a direct support to enterprises and people in difficult times, demonstrated in goods and service prices, which helped curb inflation, stimulate consumption and encourage enterprises to accelerate production and business.

The VAT cut led to an input cost decrease, which helped enterprises recover and scale up business. The tax cut policy was implemented without having to undergo a series of administrative procedures and satisfy strict conditions. The reduction was applied to the majority of goods.

After nearly one year of implementation, there have been no complaints from enterprises or people.

In short, cutting the VAT has had a very positive impact on consumption and production in the long term. The support helped businesses maintain production and expand business, help create more jobs, reduce the unemployment rate, and quickly recover the economy in the post-pandemic period.

This stimulates people to spend more money, and when the consumption increases, the production will increase. This, finally, helps the state budget increase the revenue by 4.3%.

However, the 2% VAT cut policy will be valid until the end of 2022 only. Analysts believe that the policy should be renewed for one more year. Enterprises have begun recovering the production, but they remain ‘fragile’. They are just like the people who have just recovered from illness, and they need a light exercise regime, not hard work.

That is why the National Private Economic Development Research Board (Board IV) has proposed extending the VAT cut policy and some other policies which showed their effects during the pandemic, including the delay in applying new land tax rates, and restructuring debts.