The 2% VAT cut: One arrow hits three targets

Challenges to growth

According to Dr. Can Van Luc and the BIDV Training and Research Institute, Vietnam's GDP growth in Q1 2023 was only 3.32%, slightly higher than the 3.21% in Q1 2020 (when the Covid-19 pandemic broke out), lower than Q1 in the previous 12 years, and significantly lower than the government's target set in Resolution 01 for Q1 2023 (5.6%).

This demonstrates that meeting the 6.5% growth target for 2023 will be a big task, requiring strong commitment and effort from the government, ministries, and regions, as well as unity and drive from citizens and enterprises.

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The VAT cut is necessary

Furthermore, Vietnam faces other risks, such as: external challenges are still present; import and export have sharply decreased and are more clearly negatively affected; attracting and disbursing FDI has decreased; some components of the recovery program and three national target programs are still slow; businesses are facing many difficulties, and bad debts are increasing despite being largely within forecast and range of control.

"Inflation is under pressure due to both demand drivers (strong consumer demand, better money supply and circulation compared to last year) and push forces (oil and commodity prices, global services remain at high levels, notably with China's openness). However, Vietnam's inflation is gradually cooling, and the CPI for the entire year of 2023 is expected to rise by around 4-4.5% as a result of a combination of positive factors that help to control inflation, such as global price and inflation cooling, stable exchange rates, continuing interest rate reductions, weak demand, and coordinated and effective inflation-control measures," the expert analysis team said.

Tax reduction is necessary

In the midst of a bleak macroeconomic environment in the first quarter, Mr. Nguyen Minh Tuan, CEO of AFA Capital, stated that the Government has established three very clear targets since the beginning of the year: 6.5% GDP growth, 4.5% inflation management, and exchange rate stability. The latter two goals are not very concerning, but guaranteeing growth will be a challenge that must be handled.

Recently, the Tax Policy Department (Ministry of Finance) filed a letter for consideration to the Ministry of Finance, recommending two possibilities for cutting value-added tax (VAT), as follows: Option 1: Reduce the VAT rate by 2% for the group of goods and services currently subject to a 10% tax rate; Option 2: Reduce the VAT rate by 2% for the group of goods and services currently subject to a 10% VAT rate, with the exception of some goods and services subject to the tax rate in 2022 under Resolution 43 on financial support policies for the economic and social recovery and development program.

In actuality, some products and services are subject to value-added tax, generally at a 10% rate, therefore this tax reduction will only apply to taxed goods and services, whether choice 1 or 2. Banks, stocks, and insurance will not gain because they are not subject to value-added tax. In the real estate industry, for example, when individuals buy a house, the contract will contain two parts: the house and the land, with the land exempt from VAT but the house subject to it. As a result, a 2% reduction in real estate taxes will simply affect the value of the home, but in contracts, the value of the land is always included.

However, this is an alternative to "ease the burden on the people" and is required to boost consumption and investment. The 2% tax cut is planned to begin on July 1, implying a new assistance measure for the second half of 2023.

Mr. Phan Le Thanh Long, a financial expert, assessed the tax reduction program further, determining that the 2% drop in value-added tax would be a substantial figure in the economy, while also putting strain on the state budget and building a debt structure for the coming years. The share of value-added tax in the state budget averages around 25%. Vietnam's debt cap is now less than 65% of GDP, which is deemed safe.

"It can be said that policies with direct support such as public investment are still weak, only local businesses or a number of sectors of the economy benefit from it. The same goes for monetary policies, if interest rates decrease and money supply increases, only certain groups, especially those related to financial products, will benefit; while the reduction of VAT will be highly appreciated as it has a positive impact on everyone.

This can be seen as a triple win situation, firstly it helps increase GDP growth, secondly it reduces CPI and thirdly it creates motivation for people to grow, supporting monetary policies to loosen up. While stability is very important for Vietnam, tax support policies will be an important driving force for our macroeconomic situation and the third quarter will have more bright spots," said Mr. Long.