Economist Pham Chi Lan: Raising VAT – For whom?

In these hot summer days, the issue of raising the land rent in some places is still boiling while Cai Lay tollbooth has revealed the ugly stories behind BOT(build-operate-transfer) transportation projects. Adding to these, the Ministry of Finance (MoF) is proposing to revise five tax laws.

In this piece, I just want to talk about VAT - the burning issue. In a country where the State affirms that it is "of the people, by the people, for the people", raising VAT is eventually for whom?

On August 19th, I attended a ministry meeting for financial experts to suggest for the draft law on revising five taxes, which was being finalised to be submitted to the Government.

Since I am not a financial expert, I only give three opinions on this draft.

Firstly, with the goal of "restructuring the State budget to secure the national finance" under Resolution No. 07-NQ/TU of the Politburo, it would be not enough if we only seek ways to increase revenues as this draft shows.

It is well known that the State budget is always overspending and public debts are enormous. Besides, the State and state-owned enterprises (SOEs) are managing and using Vietnam's largest resources. Improving efficiency, combating corruption, wastefulness and loss in the utilisation of these resources, along with reforming and enhancing the effectiveness of the State apparatus are much better ways to control public expenditure.

Only focusing on collecting taxes from the people to secure the budget is not fair to the people.

Secondly, I endorse making a law to revise five tax laws. With this method, the MoF and the State can compare and adjust the tax policies to be more reasonable.

An impact assessment report must be independently and objectively conducted to analyse the socio-economic impacts of the tax adjustment. The report should focus on four issues: the costs and benefits of adjusting five taxes; who benefits, who loses from this adjustment; is there a better way other than raising taxes; if changes are still needed, how to benefit all parties.

If these are clarified, I believe we will figure out:

- The cost of raising taxes is enormous as enterprises and the people are already burdened with massive taxes. Investigations show that firms have to pay taxes and fees worth up to 40% of their income. The people also have to share that burden with enterprises (as the selling price will increase accordingly) while shouldering many more direct payments.

The decrease in the productivity of companies and the consumption of the people due to increased taxation will inevitably limit the economic growth in short-, medium- and long-term. The budget will increase, but it is likely to make the State agencies more carefreely spend the money of the people without the motivation to renew themselves. It is apparent that the costs are more than the benefits.

Also, who benefits and who loses? The State benefits, as mentioned, though the gain is unsustainable. The majority of the people and firms are the most direct "victims" of the VAT increase. Notably, the low-income will suffer the most, as even "just" a 2% increase is significant to their income.

It should be reminded that increasing VAT will hit on all consumers in the society including the elderly and children because most of the products are now subject to VAT. The majority of the workers have not benefited from basic salary increase yet, the high price of all kinds of goods has already worried them.

Apart from that, is there a better way other than raising taxes? Obviously, yes, as stated in the first part. The problem is that whether the agencies and Government officials want to pursue them or not.

Also, the State should reduce the privileges for SOEs and excessive tax breaks for some foreign direct investment (FDI) projects. Otherwise, increasing taxes on real estate projects or combat corruption are also good ways to increase the revenues. The money collected from these activities is even likely to exceed the expected VAT increase.

Moreover, how to adjust to benefit all parties? Ideally, VAT should not be raised as the tax is already high, making a huge contribution (27%) to the national budget. Notably, however, the tax impacts the majority of the population. The State will certainly lose more from the loss of support of the people.

Thirdly, the MoF argues that raising VAT is reasonable as our 10% tax rate is low and does not follow the international practice. Why do we not learn from other international practices? For example, taxpayers are entitled to the right to consult on the related tax policies, to be informed and to supervise the budget revenues and expenditures. Therefore, they can make sure their tax money is being used efficiently.

The economic foundation and the income levels of the population of different countries differ from one another and ours. Hence, it is difficult to compare, not to mention it is unfair to only compare our economy to the countries with higher VAT levels.

The general principle of regulating incomes in the tax policies is taking more from the rich to make up for the poor, but some tax policies in our country are against it.

I hope my three opinions along with many other comments will be considered by the MoF, the Government and National Assembly. The question "Raising VAT – For whom?" will be answered in the upcoming tax law.