Tax reductions to control petroleum price are not an effective solution

As.Prof. Dr. Dinh Trong Thinh, Senior Lecturer of the Academy of Finance

Facing the pressure of world petroleum prices, domestic petroleum prices have been revised up above VND 30,000 per liter. What is your opinion on prices at the moment?

Petroleum products are a special commodity and a a basic material of the economy, so the price management has a great impact. However, currently, domestic petroleum prices are being affected by the fluctuation of the world price. Vietnam applied the market economy so it must comply with the market economy rules; the price is revised up and down according to the fluctuation of market. That's the principle. And when we accept following the market economy, the price must be complied with the law of supply and demand, especially the price of petroleum due to the big influence of world prices.

The inter-Ministry of Industry, Trade and Finance has managed petroleum prices quite flexibly and effectively, met the requirements of the National Assembly and the Government on economic recovery and growth, helping keep the consumer price index in the first months of 2022 at a reasonable level.

The inter-Ministry has also taken measures, such as; using the stabilization fund, reducing environmental protection tax to help businesses achieve recovery and growth.

The surge in the price of petroleum has had impacted on the prices of many industries and commodities. In particular, there are items that are not affected much but also increase in price. Do you have any comments on this?

Currently, many items in the economy are not much affected by petroleum prices, but their prices also go up. For example, the price of vegetables, tubers, pork and chicken is not affected by petroleum price but also increase several tens of percent. This is an unusual sign. Now, the most affected sector is transportation.

To stabilize market prices, in my opinion, state agencies have to calculate the composition of products. Only when the state agency knows the exact price, they can control selling price of the businesses, restrain the price from increasing uncontrollably as it has been happening for a long time. For example, petroleum accounts for 40% of the value of transport cars. If it increases by 10%, the price of transportation must increase by 4%. For production and business operators, if the prices increase by 10%, the possibility of price increase is only 2-3%, cannot surge to 20%.

Facing the increase in petroleum price and the demand to support people and businesses against the impacts of the Covid-19 pandemic, there have been proposals on tax exemptions and reductions for this item to reduce the price. How do you assess these proposals?

Currently, taxes applied to petroleum products, including import tax (for imported petroleum products), value-added tax, excise tax (for gasoline) and environmental protection tax (no charge or fee for petrol and oil), ensuring compliance with international practices as well as Vietnam's practice.

Compared with many countries in the world, Vietnam’s proportion of tax in selling price is still lower than the general average. The tax proportion in the selling price of petroleum product in many countries is about 45%-60% (except for some countries with large oil reserves, the proportion is lower). Meanwhile, the proportion in Vietnam for gasoline and oil is about 38% and 20%, respectively.

Therefore, tax reduction on petroleum will create a price gap with bordering countries and cause smuggling and tax evasion by petroleum traders, causing damage to the State budget. Besides, a reduction on petroleum products will discourage businesses in the economy from saving energy in and petroleum product.

Furthermore, tax for petroleum product is Government long-term policy to ensure the State revenue and satisfy the requirements of environmental protection, reduce emissions, ensure reasonable and economical use of non-renewable resources and regulate income in the economy.

In my opinion, the tax reduction is not recommended because it may bring more problems than it solves. If the tax is lowered, there will be risks of affecting the State budget. We must also realise that tax reductions are not generally intended or targeted support measures. If tax reduction is targeted, the State must intentionally clarify particular objects to support, where the support will create economy strength. If supporting production, the State needs to pay attention to the price of oil, not the price of gasoline.

I suggest the solution at this time is that the higher the price of petrol, the more effectively it must be used, so the State needs to find a solution to encourage people and economic sectors to use the products economically. For production and businesses, they must consider how to minimize transportation costs and plan production to save petroleum. In the long term, it is necessary to change the use of petroleum to other source of energy.