Thorough impact assessment needed before excise tax hike on beverages: expert

Comprehensive impact assessments are needed before excise tax adjustments on beverages since they can cause shock and damage, says Nguyen Van Phung, former head of the Bureau of Large Enterprises Management under the Ministry of Finance’s General Department of Taxation.

The Ministry of Finance is collecting feedback on imposing exercise taxes on beer, alcohol and soft drinks. What’s your opinion?

I have carefully studied the draft Law on Excise Tax submitted by the finance ministry to the Government. This draft has many new points compared to the previous version and it proposes two options.

From the perspective of both resident and researcher, I see that this draft has some improvements. First of all, taking into account public opinion, it does not immediately apply the specific tax or hybrid tax (hybrid tax is a mixed formula between ad valorem tax and specific tax).

In Vietnam, if the specific tax or the hybrid tax is immediately applied, it will cause shock and damage to businesses and consumers because most of us have average incomes and cannot pay millions of VND (VND1 million = $40) for a bottle of wine, or hundreds of thousands of VND (VND100,000 = $4) for a bottle of beer.

We can only consume affordable products, for example, VND15,000-20,000 ($0.8) per can of beer or VND100,000 ($4) per a bottle of wine. Therefore, applying the ad valorem tax (also known as the proportional tax) is reasonable, and I appreciate that the drafting body is gathering feedback on its proposals.

A tax hike that increases product prices is typically aimed at changing consumer behavior, protecting consumer health as well as ensuring social order and safety. But statistics show that consumption of beer increased from 3.8 liters per person per year in 2003-2005 to 8.3 liters in 2015-2016.

The excise tax on beer was 45% in 2010-2012, 50% from 2013 to 2016, 55% in 2016, 60% in 2017-2018, and 65% since 2018. The tax has been hiked continuously over the past 10 years, but average per capita consumption has more than doubled during this period.

The rate of people abusing alcohol and committing violence in 2010 was only 1.4% of the population, but rose alarmingly by 10 times to 14.4% in 2016. So, we can see that tax climbed by 5% each year, but violent behavior increased 10 times. It was only when Decree 100/2019/ND-CP on administrative sanctions for violations in the field of road traffic was implemented strongly by the government that there were dramatic changes in violent behavior. I see that the impact of administrative measures is stronger than that of taxes.

Perhaps that’s why the drafting agency has proposed two options. The first is to increase the excise tax by 5% each year to reach 90% by 2030 and the second is increasing it by 15% to 80% in 2026 and then 5% each year to 100% by 2030. Using tax hikes to change behavior immediately may be a good idea, but I am also very concerned. Many experts' analysis on the impact is not comprehensive.

The question is: "If we increase the tax right now, will we ensure business development?" We cannot confirm this with certainty, but the answer should be based on scientific research and application of comprehensive economic models.

Currently, the drafting agency is proposing to implement option 1. Increasing taxes, including the excise tax, will generate funds for budget spending, ensure national defense and security, and social security, and adjust personal income tax rates.

Regarding sugary drinks, data from the Ministry of Health and the National Institute of Nutrition on their impact on people's health is not consistent. Therefore, the management agency should announce which soft drinks have adverse health impacts.

In my opinion, to ensure reasonable budget revenue in the context of restructuring tax revenue sources, we must adjust indirect taxes, including the exercise tax. In addition, there should be communication campaigns for consumers to accept prices, and for manufacturers to improve technologies, innovate formulas, and reduce toxic substances. Enterprises today pay too much heed to advertising but not improving products and production processes.

Many people say that the sudden tax hike will cause many difficulties for businesses, especially in the current context. In your opinion, can the tax increase be delayed?

At this moment, I cannot say whether it can be delayed or not. As I said, the two options proposed by the finance ministry must be carefully studied, based on scientific data.

We have only collected feedback on the draft Law on Exercise Tax from members of the National Assembly in October, and the new law is expected to be passed in May next year. Therefore, we still have time to study the draft carefully, especially the two proposed options. We need to hear from many groups and experts.

The exercise tax amendment has many goals. In your opinion, what is the main goal: increasing budget revenue, limiting consumption or regulating production?

The main task of taxes in general and the excise tax in particular is to create revenue for the state budget. At the same time, this will change production, consumption and income behavior. It will also affect supply-demand and social relations.

Especially in the current context, when we must actively fight corruption, tax policies must be more impartial, more effective, and weighed more carefully.

Sudden adjustments will make it difficult for businesses to adapt, so it is necessary to research and collect opinions extensively and thoroughly.

If it causes difficulties for businesses, can the goal of increasing budget revenue be achieved?

This is a difficult problem that we need to solve. Tax rates must suit people, income levels and consumption.

All tax adjustment options should be calculated carefully, considering multi-dimensional impacts. We have to collect taxes but we also have to ensure good growth, social stability and national development.

In general, there are three taxation methods – ad valorem tax (proportional to the value of the underlying asset), specific tax (constant figure), and hybrid tax as a mixed formula between ad valorem tax and specific tax.