Increasing value added tax (VAT) by 2% is the proposal of the Ministry of Finance (MoF) in the revised draft Tax Law.
TheLEADER had a brief exchange with Dr Nguyen Duc Thanh, Director of Vietnam Institute for Economic and Policy Research (VEPR) on this issue.
What are the effects of the VAT increase proposal by the MoF, if put into operation, on Vietnam's economic growth?
Dr Nguyen Duc Thanh: Increasing VAT will raise prices and social costs, hence slowing economic growth. People will have to spend more while their income remains unchanged.
The tax increase does not necessarily accompany economic growth and macroeconomic development. It originates from the State’s budget deficit. In principle, in the event of a budget deficit, the State will borrow more and raise taxes to increase revenue. The burden will be put on the society.
In general, this is the consequence of the weak economic management of the State in a long period.
Increasing VAT from 10% to 12% is not a massive shift. However, it will set a bad precedent. This is a sign of the State's weak ability to balance the budget.
The continuous tax increasing currently encounters strong opposition from the public, as people and businesses are getting tired. That the State has poorly managed the budget but still wants to raise taxes worries them.
We cannot predict whether the State will increase taxes, increase what type of tax in case the proposal of VAT increase fails, and how long this solution will last.
Due to that fear, in the future, domestic and foreign investment will tend to aim at a more favourable environment. It will negatively affect the Vietnam investment market and the development of the whole economy.
So, in your opinion, instead of raising taxes, what is the optimal solution for economic development nowadays?
Dr Nguyen Duc Thanh: The need to increase taxes stems from weak budget management, uncontrolled budget spending and poor performance of the State.
We are now out of control in spending the budget. Meanwhile, revenues are declining, and businesses are not operating well as the economy does not achieve the desired results. Therefore, the proposal of the MoF expects to fill the deficits and balance the state budget.
However, in my opinion, this is not a sustainable as no society can thrive while shouldering a heavy taxation burden. It will slowly shrink.
Meanwhile, the cause is the State’s cumbersome management system and budget spending is excessive. Therefore, for sustainable development, we must reduce and restrict spending.
The State’s management system should also be reformed into a more efficient one. Thus, the economy can develop sustainably.
The state should be cautious while deciding to raise taxes. To stabilise your budget, we should control spending and manage the budget but not hastily raise taxes.