Increase in Excise Tax: Shifting to Compound Tax system appropriate direction

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The workshop on "Excise Tax-Harmonizing the State budget revenue regulation and business development" was held in August 2022 in Hanoi.

This direction is consistent with the general trend in the world. Many countries have revised the tax structure from the per cent rate to the compound structure before shifting to a Flat-rate tax, especially supporting the gradual tax increase in the long road map.

Strictly control smuggled and counterfeit cigarettes

The Government has set strategies, goals and plans for the Tobacco Industry, which are specified in the Prime Minister's Decision 508/2022/QD-TTg dated April 23, 2022, on the "Strategy for Tax system reform to 2030" and Decision 2439/QD-BTC dated November 22 of the Minister of Finance promulgating the "Plan on tax system reform to 2025, as well as Vietnam's commitment" under the Framework Convention on Tobacco Control (FCTC) of the World Health Organization (WHO).

The basic principle of implementing the FCTC is setting prices and tax assessment measures to reduce tobacco consumption and protect public health.

Among countries acceding to the FCTC, Vietnam is also recommended to implement Article 6 of the Convention.

Accordingly, implementing the most streamlined and effective tax system aligns with public health and financial needs. In addition, reviewing to implement the Flat-rate tax system or Compound Tax with a minimum rate. Because these systems have more advantages than normal systems.

The Excise Tax Reform Strategy for 2021-2030, Decision 508 and Decision 2439 states that the development of a roadmap to revise up tax rate for tobacco, beer, alcohol, and automobiles… is to regulate consumption and comply with international commitments; apply a combination of proportional tax rate and Flat-rate tax for taxable goods and services.

In the "Master strategy of Vietnam's tobacco industry to 2010 and vision to 2020", the Government also requires control of smuggled and counterfeit cigarettes. Specifically, strengthening inspection and control of the transportation, and trafficking of smuggled cigarettes, funding from the State budget and tobacco manufacturers to prevent and combat smuggled cigarettes and support equipment and human resources for anti-smuggling forces.

In addition to supporting to achieve of the budget target and health, the new tax system needs to balance the goal of reducing consumption volume with the control of smuggled and fake cigarettes; balance the reduction of negative social impacts that the new policy may cause, such as the risk of losing jobs of the tobacco workers.

Roadmap for Excise Tax calculation

According to Ms Dinh Thi Quynh Van, General Director of PwC Vietnam Auditing and Consulting Company, among the three methods of excise tax assessment, the fixed tax assessment is chosen by most countries (66 countries), followed by compound tax (61 countries) and percentage tax (47 countries) in 2018.

According to PwC, when amending the Excise tax on tobacco, it is necessary to study international practices and practical experiences from some countries so that when the new policies are promulgated, they can harmonize goals.

The WHO's report in 2021 also showed that countries tend to apply excise tax structures under compound or fixed tax. Meanwhile, the number of countries that apply tax percentage tax structure decreased by 25% in 2018 from 55 countries to 41 countries.

According to WHO, the development of tax policies for tobacco should prioritize simplicity, and a single-tier fixed tax structure is the best because it can be easily adjusted regularly under inflation and GDP growth. In addition, simplifying the excise tax structure on tobacco will facilitate tax administration, reduce tax avoidance and evasion, increase revenue, and reduce tobacco use.

Shortly, WHO recommends that countries applying percentage tax, such as Vietnam, shift to using the compound tax system by adding a flat tax component or providing a minimum excise tax rate, the countries applying the compound tax system should consider increasing the flat tax component in the total excise tax before switching to a flat-rate tax system.

PwC Vietnam also said that an effective tax structure could balance health goals and create sustainable tax revenue while controlling illicit tobacco consumption.

Based on the analysis of the current excise tax policy of Vietnam, the goals of the Government and tax policies of some countries, the PwC Vietnam's report shows some solutions for reforming the Excise tax structure and implementation roadmap in the short term and long-term orientation.

Option 1 is to switch to a Compound tax system, then gradually increase the flat-rate tax component and decrease the relative component. As a result, it will move to a single-tier flat rate tax system. The second option is to switch to a multi-tier flat rate tax system (4 tiers), then gradually reduce tiers to become a single-tier flat rate system.

Each of the above options has its advantages and disadvantages, but PwC Vietnam believes that option 1 is the more appropriate option for Vietnam and is consistent with the Ministry of Finance reform orientation.

In the current context of Vietnam, Ms Dinh Thi Quynh Van proposed that the tax increase must follow a transparent road map. The increased level should be higher than the inflation rate.