The Ministry of Finance recently dispatched an official letter to the General Department of Taxation and the General Department of Vietnam Customs regarding the policy on Value Added Tax (VAT) reduction for 2023.

TWO PROPOSED OPTIONS FOR 2% VAT REDUCTION

In this document, the Department of Tax Policy (Ministry of Finance) stated that pursuant to the draft Resolution of the Government's regular meeting in March 2023, the Government tasked the Ministry of Finance with leading and coordinating with relevant ministries, agencies, and localities to resolve enterprise VAT refund issues and submit proposals to the National Assembly to consider extending the 2% VAT reduction policy.

On this basis, the Ministry of Finance outlined two options for the 2% VAT cut in 2023:

Option 1: A flat 2% cut in the VAT rate for all groups of goods and services currently subject to the 10% tax rate (reducing it to 8%).

Option 2: A 2% cut in the VAT rate for goods and services currently subject to 10%, excluding specific sectors as previously enacted in 2022 under the National Assembly's Resolution No. 43 on fiscal and monetary policies supporting the socioeconomic recovery and development program.

Regarding implementation timeline, the Ministry of Finance proposed a 6-month duration starting from policy enactment, tentatively from July 1 through December 31, 2023.

To formulate comprehensive reporting data, the Ministry of Finance requested the General Department of Taxation and the General Department of Customs to review the execution of the 2% VAT reduction enacted under Resolution 43 and Decree 15, assess state budget revenue impacts under both options, and recommend the optimal 2023 policy framework.

WEIGHING PROS AND CONS OF BOTH OPTIONS

Earlier, numerous economic experts, the Private Economic Development Research Board (Board IV) under the Prime Minister's Advisory Council for Administrative Procedure Reform, the Food and Foodstuff Association of Ho Chi Minh City (FFA), and the Vietnam Beer-Alcohol-Beverage Association (VBA) repeatedly petitioned the Government to extend the 2% VAT cut through the end of 2023 alongside supplementary corporate support mechanisms such as debt rescheduling and loan classification maintenance, given persistent headwinds facing manufacturing and business operations.

Previously, from February 1, 2022 until the end of 2022, VAT was lowered from 10% to 8% across most goods and services pursuant to Government Decree No. 15/2022/ND-CP. Reviews showed that this stimulus delivered positive, tangible benefits across the economy, aiding citizens and enterprises alike.

For consumers facing tightening financial constraints and shrinking incomes, a 2% VAT reduction directly enhances purchasing power, enabling consumers to acquire more goods with the same budget and improving living standards.

For enterprises, tax cuts provide relief across both input and output costs. Cheaper inputs directly lower production costs, freeing up capital for reinvestment and capacity expansion. On output, reduced consumer prices indirectly boost sales volumes and market turnover.

According to economist Dinh Trong Thinh, lowering VAT rates curbs goods prices and tempers inflationary pressure. Thus, the policy exerts a dual benefit: stimulating production growth while safeguarding macroeconomic stability.

However, experts also note that extending the VAT reduction requires thorough deliberation. Currently, two standard VAT brackets exist: 10% and 5%. Some industry groups have questioned why 5% items receive no tax relief, raising equity concerns.

Furthermore, target beneficiaries require realignment. While 2022 policies focused on pandemic relief for heavily impacted sectors, economic hardship is now widespread across all sectors, making preferential exclusions under Option 1 less defensible.

Crucially, one year of executing Resolution 43 revealed substantial administrative friction and confusion among corporate accountants struggling to classify which goods qualified for tax reductions. Repeating Option 1's selective exclusions could recreate administrative bottlenecks and operational compliance burdens.

Consequently, corporate accountants strongly favor a uniform 2% VAT reduction down to 8% across the board, noting that selective 2022 criteria led to significant classification stress and harsh penalties for unintentional errors.

Nevertheless, an across-the-board reduction as envisioned under Option 2 poses a substantial fiscal impact on the state budget, as widening support to all sectors inevitably entails significant revenue shortfalls. Therefore, authorities must weigh both fiscal feasibility and economic stimulus benefits carefully.

Source: VnEconomy