Recently, the Vietnamese Government has submitted to the National Assembly to reduce the value-added tax of 2%, except for telecommunications, real estate, securities, insurance, and banking products.
The report submitted to the National Assembly by the Government of Vietnam on May 24, 2023 stated that the reduction of 2% value-added tax will be implemented in the second half of 2023. This reduction will apply to some goods and services subject to tax rate from 10% to 8%. The reduction of VAT to stimulate economic demand has also been implemented in 2022 according to Resolution 43 of the National Assembly.
However, it should be noted that the reduction of VAT to 8% will not apply to certain types of goods and services such as telecommunications, information technology, finance, banking, securities, insurance, business in real estate, metals, prefabricated metal products, mining products, refined petroleum products, chemical products and items subject to excise tax such as beer, wine, tobacco, etc.
In addition, some delegates also expressed their opinions about considering reducing VAT to 6% from 10%, ie a reduction of 4% to be able to stimulate stronger economic demand. This proposal has also been considered in the context of Vietnam’s economy in a state of strong deflation.
Why is deflation a concern?
Deflation, as opposed to inflation, is the stagnation, reverse development of an economy. Deflation causes and affects the economy’s aggregate demand, which is calculated by total spending, investment of the business sector, public investment, and net exports.
In particular, the net export index suffered heavy damage in May when the United States, the most important trading partner of Vietnam, was facing the problem of raising the public debt ceiling, thereby reducing the import of various types of products and goods from other countries such as Vietnam.
Public investment is slow to disburse, most clearly through a recent report stating that Vietnam currently has one million billion dong of funds to be deposited with banks due to slow disbursement, with an interest rate of 0.8%/year. This is a particularly difficult bottleneck of the Vietnamese economy, affecting the development of the economy and the main reason for the current deflation.
In order to boost spending, stimulate economic demand, and help Vietnam get out of deflation and reach a reasonably expected inflation rate for economic development, the delegates proposed to reduce VAT by 4% during the remainder of 2023.
However, this proposal is unlikely to be approved because of other effects on the overall economic picture. Currently, the delegates are focusing on analyzing and evaluating the impacts of the proposal to reduce VAT by 2% for some goods and services, estimated budget deficit of about VND 24,000 billion when VAT is reduced to 8% in the second half of 2023, which is a reduction of VND 9,000 billion compared to the tax reduction plan for all goods and services.
However, to help Vietnam get out of the current deflationary situation, some delegates proposed that the VAT reduction period be extended, instead of ending at the end of 2023, it could be considered until the end of June in 2024 or another time in 2024.