Tax hike on liquor needs thorough consideration: EY Vietnam CEO

Adjustments to the special consumption tax (SCT) on alcoholic beverages in Vietnam need careful consideration and evaluation, said Huong Vu, CEO of EY Vietnam.

Taxes play an important role in the economy. First of all, they help stabilize the market and regulate the economy. Through taxes, the government can promote one economic activity or restrict another. They affect supply and demand, thereby regulating the operation of the market and adjusting the economic cycle.

In addition to creating stable and long-term budget revenue to meet the needs of the government’s public spending and development investment, taxes also play a role in restructuring the economy; orienting the development of sectors, fields and economic sectors in accordance with the orientation of the state, while ensuring social equality through the redistribution of income.

Like other taxes, the special consumption tax (SCT) plays an important role in monitoring the government’s macro policies. It is an indirect tax used by the government as an effective tool to regulate the production, consumption and income of consumers on certain goods and services. This tax is levied once at the stage of production/import, and not imposed in circulation. Its main objective is to control consumer behavior. The SCT is only applied to a number of goods and services that the government wants to control consumption of at a reasonable level and discourage their use.

To promote and improve the efficiency of taxes in general and the SCT in particular, the Ministry of Finance recently submitted to the government a proposal on building an amended Law on Special Consumption Tax to realize the Party’s guidelines, meet the arising requirements of reality, and match tax reform trends in other countries.

Taxation methods

Despite a number of revisions since its launch in 1990, Vietnam's Law on Special Consumption Tax still only applies an ad valorem tax rate which is based on the assessed value of an item. Tax rates vary for different items, with the highest current rate of 150%, applicable to cars with nine seats or less and a cylinder capacity of over 6,000 cubic centimeters. For some commodities such as tobacco and alcoholic beverages, the government has gradually increased tax rates under a roadmap to suit management requirements at each stage of socio-economic development.

The ministry has proposed two alternative taxation methods to be implemented flexibly alongside the existing one: a specific tax rate and a hybrid tax rate which is a combination of an ad valorem tax rate and a specific tax rate.

Around the world, depending on socio-economic goals and demand for production and consumption controls, countries flexibly apply taxation methods in line with their specific conditions because each method has certain advantages and disadvantages.

Ad valorem tax rates are progressive, based on the selling prices and service supply prices. Higher selling prices lead to a higher SCT. In terms of market regulations, calculating tax based on the percentage of tax on the selling price creates relative fairness for goods and services, thereby creating flexibility in controlling consumption in proportion with income levels.

This method is often used in countries where goods and services subject to an SCT are clearly classified, with similar products having a big difference in price. Under this method, the tax will self-adjust in line with inflation and the government will not have to do anything. However, this taxation method is based on the selling price, so it could increase state management costs for price control and make it difficult to predict budget revenue.

A specific tax rate is a fixed figure levied on each output unit of products with similar features. This method is widely used in developed countries in Europe. Some countries in Southeast Asia have also applied this taxation method on items such as tobacco and alcohol.

When applied, it will immediately affect consumption behavior, especially for items in the low-priced popular segment. When a specific tax rate is imposed, each unit of manufactured/imported product sold will be subject to the same tax rate, regardless of the product's segment and its respective selling price. As such, products in the high-priced segment will have a more competitive advantage because their selling prices will increase less, while prices of products in mid- and low-priced segments will rise more. This would create an unfair business environment.

The hybrid tax is a combination of the two, but can lead to more complicated calculations and difficulties in estimating budget revenue. Some countries use this method as an intermediate step before changing from ad valorem tax rates to specific tax rates.

Adjustment of SCT on liquor in current contexts

Many countries around the world impose an SCT on alcoholic beverages to control production and consumption, and limit the abuse of these products to protect consumers' health. They also use different taxation methods depending on their specific situations. Some people have suggested Vietnam study the imposition of specific tax rates or hybrid tax rates on alcoholic beverages like other countries. However, as Vietnam's liquor market has very different characteristics compared to the rest of the world, policymakers need to carefully consider and evaluate any taxation method changes so that they will have a minimal impact on businesses while achieving policy goals.

Major global fluctuations and the Covid-19 pandemic have affected businesses across all industries and fields, and alcoholic beverage producers are no exception. Their business results have recorded a significant decrease in recent years. The Covid-19 pandemic, which broke out in late 2019, and the global supply chain crisis caused by the Russia-Ukraine war have greatly impacted the production and consumption of beer in particular and alcoholic beverages in general, creating many difficulties and challenges for domestic producers.

At present, businesses are focusing on overcoming difficulties and restoring production in the post-Covid-19 period, so the government should continue to offer support measures to help them stabilize production. If the SCT policy needs to be amended to meet management and reality requirements, the application of an ad valorem tax rate on alcoholic beverage products needs to continue, and adjustments to tax rates under a roadmap proposed by the finance ministry is an appropriate option.