Alcohol industry debates tax hike shock

The recently proposed increase in special consumption tax on alcoholic beverages like beer and spirits has sparked significant debate among government agencies, experts, businesses, and consumers.

The Ministry of Finance is currently drafting an amendment to the Special Consumption Tax Law, suggesting a tax increase of 15 per cent to 35 per cent on beer and spirits compared to the current rates.

The draft has garnered support for its emphasis on public health, aiming to reduce alcohol abuse and secure state revenue. However, many experts caution that the tax hike should be carefully considered, weighing the pros and cons based on scientific data to avoid unintended negative impacts on the market and the broader economy.

Industry associations, such as the Vietnam Chamber of Commerce and Industry and the Vietnam Beer-Alcohol-Beverage Association, argue that the proposed tax increase should be realistic and consider the industry's capacity to absorb it while balancing the tax's benefits. They also stress the importance of aligning with global practices and regulations.

Some experts believe that a significant and rapid increase in the special consumption tax on alcoholic beverages could exacerbate difficulties for producers and workers, particularly in the aftermath of the Covid-19 pandemic and the stricter penalties for drinking and driving introduced by Decree 100/2019/ND-CP.

The alcohol industry has been grappling with rising raw material costs and declining demand, leading to reduced revenue and profits in 2023 and early 2024. Some breweries have even had to suspend operations to optimize assets and business activities.

Recently, Heineken Vietnam reported that it had suspended operations at its Quang Nam brewery after nearly 25 years, resulting in job losses for about 100 workers.

Can the alcohol industry handle a "tax shock"?

Experts and businesses are concerned that the proposed tax hike by the Ministry of Finance could "shock" the alcohol industry and the broader economy. However, the special consumption tax on beer and spirits has been gradually increasing over the years, and companies have adapted.

Nguyen Van Phung, former Director of the Large Enterprise Tax Department under the General Department of Taxation, noted that the beer tax increased from 45 per cent during 2010-2012 to 65 per cent in 2018 and is projected to reach 100 per cent by 2030. Despite these increases, per capita alcohol consumption has more than doubled, with a worrying rise in alcohol-related violence.

“Only when Decree 100/2019 was enforced did these violent behaviors change, highlighting that administrative measures can be more effective than tax increases,” Phung emphasized.

Notably, the business performance of major industry players like Sabeco has remained strong despite the rising tax burden. In 2014, Sabeco recorded revenue of VND 24,635 billion ($980 million) and net profit of VND 2,800 billion ($111 million). These figures increased steadily, peaking at VND 38,134 billion ($1.52 billion) in revenue and VND 5,370 billion ($214 million) in profit by 2019 before declining in 2020 due to the pandemic and Decree 100.

Nevertheless, Sabeco's business rebounded in 2022, surpassing its 2019 record, and has continued to show positive recovery in recent quarters.

Another major player, Heineken, has seen its Vung Tau brewery's capacity increase more than 36 times since 2017, reaching 1.1 billion liters annually. Despite closing its Quang Nam brewery, Heineken plans to invest nearly VND 12,600 billion ($501 million) in a new brewery in Ba Ria-Vung Tau with an annual capacity of 1.6 billion liters.

These developments demonstrate that companies in the alcohol industry have successfully maintained growth despite the heavy burden of special consumption taxes over the past decade.

Vietcap Securities, in its latest industry report, highlighted that beer sales volumes typically decline for two to three years following a tax increase but generally do not significantly impact profit margins due to the ability to pass on the tax burden to consumers.

Given Vietnam's favorable long-term demographics, Vietcap forecasts that beer consumption will grow at a compound annual growth rate of 5 per cent between 2023 and 2028.