VAT Reduction in Vietnam from 10 to 8 Percent Expected After Government Approval

The Vietnamese government has proposed a reduction in VAT tax to address the current economic challenges. This could impact foreign firms if approved.

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Last week, the Vietnamese government approved a plan from the Ministry of Finance to lower the value-added tax (VAT) from 10 percent to 8 percent. This reduction is expected to provide a much-needed boost to businesses struggling with various domestic and international challenges.

Broadly speaking, the VAT is a consumption tax that applies to transactions in goods and services within Vietnam. Notably, it does not apply to goods for export or services sold to customers abroad.

The VAT reduction could see the cost of most goods come down by two percent. However, it is usually at the discretion of the business to decide whether to pass these savings on to the end consumer.

The cost to the state budget

In February of 2022, the Vietnamese government cut the VAT from 10 to 8 percent to boost the pandemic-hit local economy. The cut, which was in place until the end of December of 2022, cost Vietnam’s state budget an estimated 49.4 trillion VND (US$2.2 billion).

This time around, the VAT reduction is estimated to cost the budget an approximate 5.8 trillion VND or US$246.7 million per month. If the policy is in place by the end of June, this could see the state budget reduced by a total of 34.8 trillion VND or US$1.48 billion in the second half of the year.

Why the economy needs stimulus

Vietnam’s economic growth, though still strong, has slowed this year. Expectations are that Vietnam will reach around 6 percent GDP growth in 2023, a significant drop from the 8 percent recorded last year.

This is partly due to higher inflation connected to higher fuel prices in key export markets. There are, however, several other domestic developments that are weighing heavily on the Vietnamese economy.

Vietnam’s real estate sector, for example, has experienced a number of challenges from bond market reforms to high profile arrests that have seen the market slow considerably. The tourism sector has also been slow to recover post-COVID relative to its regional peers. Furthermore, capital controls have limited how much domestic firms can borrow and subsequently how much they can invest in growing their businesses.

Moving forward

The VAT tax reduction proposed by the Ministry of Finance, still needs to be approved by the National Assembly. With the support of the government, however, it is likely to succeed. This could see a boost in consumer purchases and businesses may once again be able to find the extra cash they need to expand.

Foreign firms that need assistance with their tax planning and compliance obligations in Vietnam can contact the tax professionals at Dezan Shira and Associates.

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