Exemption of excise tax on domestic automobiles: Considering WTO commitments

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Exemption of excise tax for domestically produced cars will be decided by the Government. Photo: H.P.

The Finance Ministry said that it would study and report to competent authorities deciding the abolition of excise tax on the domestic production value for automobiles and reducing the import tax on raw materials for the production of automobile components in the domestic market.

Import tax is reduced, difficult for domestic production

In the current situation, Vietnam has joined quite a number of free trade agreements. In particular, some of the typical free trade agreements affecting the automobile industry in Vietnam are: AFTA (ASEAN Free Trade Agreement), VJEPA (Vietnam-Japan Economic Partnership Agreement), VKFTA (Vietnam-Korea Free Trade Agreement), ACFTA (ASEAN-China Free Trade Agreement), and etc.

However, in terms of direct impact on the domestic automobile market, the most obvious agreement is the ASEAN Free Trade Area (AFTA) with the introduction of tariffs on imported cars by 0% in 2018, which reduces the sale price for automobiles.

According to Thanh Cong's analysis at the Industry and Trade summit held in the middle of January 2018, the tariff reduction under the FTAs also brought difficulty in the development of supporting industries in the country requiring investment and close linkages among local producers. Meanwhile, the production base of the Vietnamese automobile industry is now just at the level of simple CKD assembly. This is pretty big pressure for the domestic industry.

As a result, Thanh Cong and the Ministry of Industry and Trade have issued excise tax exemptions for the value of domestically produced components for automobiles. This is a measure that has been adopted by countries in Southeast Asia such as Malaysia, Indonesia, or India for a long time to encourage the domestic production and assembly companies to promote investment in the field of supporting industries, improving the localization rate of the product as well as easier access to output (competitive selling price).

Along with that, it is proposed for reduction and exemption of import tax on raw materials for components manufacturers in Vietnam with the commitment of enterprises on long-term investment, production and use of human resources, and technology transfer. This solution will help attract investment from domestic and foreign manufacturers.

Report to superior authorities

In response to this petition, the document signed by Ms. Nguyen Thi Thanh Hang – the Deputy Director of Tax Policy Department, the Ministry of Finance stated: Following the directions of the Politburo, the National Assembly, the Government and the Prime Minister; the Ministry of Finance has reviewed and evaluated the implementation of the tax Law and planned to report to the Government for submission of the draft Law on Amendment of 6 Tax Laws to the National Assembly.

The Ministry of Finance has also received an official letter from the Ministry of Industry and Trade on the proposal to amend the excise tax policy as proposed earlier by Thanh Cong Company.

However, during the review of the Draft Amendments, it was also argued that if the amendment was to exempt excise tax for the domestic value, the application would violate Vietnam’s commitments with WTO. As a result, the Ministry of Finance acknowledged the comments of Thanh Cong and the Ministry of Industry and Trade to coordinate with relevant ministries and agencies to study and report to competent authorities for consideration and decision.

With regard to the exemption and reduction of import tax on raw materials for automobile parts in Vietnam, the Ministry of Finance made reference to the current provisions of law such as Decree No. 118/2015 / ND-CP detailing and guiding the implementation of Investment Law, Export Tax and Import Tax Law No. 107/2016 / QH13 to confirm that incentives for the project, manufacturing enterprises and products were available.

As for tariff rates, between 2018 and 2025, 10 FTAs which were signed by Vietnam shall enter into a period of sharp reduction in tariffs (basically 0%), in which the tariff rate of 0% for components will be applied at ATIGA (Vietnam - ASEAN), ACFTA (Vietnam, ASEAN and China).

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However, the authority to regulate the import tax rate depends on the Government. Thus, the Ministry of Finance has requested Thanh Cong to provide details of the list of raw materials and materials which can not be produced domestically. Accordingly, this agency shall coordinate with relevant ministries to study the plan and report to the Government for consideration and decision in the coming time.