Tax policies for scrap and waste products

Production activities at Vinatex Hong Linh Joint Stock Company. Photo: H.Nụ

Manufacturing Sportswear JSC is a joint stock company specialising in manufacturing garments for export. Is the scrap collected during the production process within the rate of wastage subject to import duty exemption when carrying out customs procedures? Is scrap collected and then destroyed by combustion subject to import duty?

Regarding this issue, according to the General Department of Vietnam Customs, as Clause 5 Article 25 of Decree No. 08/2015/ND-CP (referred as Decree 08) is amended and supplemented in Clause 12 Article 1 of Decree 59/2018/ND -CP (referred as Decree 59) stipulating the declaration of tax payment for goods changing use purpose. Also in Article 21 of Circular 38/2015/TT-BTC (referred as Circular 38) is amended and supplemented in Clause 10 Article 1 of Circular 39/2018/TT-BTC (referred as Circular 39), transferring to domestic consumption or change of purpose of goods which have completed import-export procedures, would be carried out only after the customs declarant completed customs procedures for new declarations; for goods changing use purposes or transferred for domestic consumption, taxpayers must declare and fully pay tax and monetary penalties (if any) in accordance with regulations.

Article 55 of Circular 38 amended and supplemented in Clause 35, Article 1 of Circular 39 stipulating norms of processed goods, export production; Article 71 of Circular 38 amended and supplemented in Clause 49, Article 1 of Circular 39, scrap and waste products collected during the export production, when being sold or consumed domestically, are exempt from import duty but it must be declared, paid VAT, excise tax (if any) and environmental protection tax (if any).

According to the above regulations, for scrap and waste products generated during the production process, which are within the actual norms that meet requirements as stipulated in the Article 55 of Circular 38 amended and supplemented in Clause 35, Article 1 of the Circular 39 when destroying, it is not required to declare for import tax payment.

Regarding VAT, according to Article 3 of the Law on Value Added Tax No. 13/2008/QH12, goods and services used for production, business and consumption in Vietnam are subjected to VAT. If scrap and waste products are destroyed, it is not required to declare and pay VAT. Enterprises must pay VAT for scrap which is destroyed but it still has value in use in Vietnam in accordance with the Law on VAT.

CEDO Vietnam Co., Ltd is an enterprise specialised in manufacturing and exporting products from plastic. In the manufacturing process, scrap generated from the production cannot be recycled. Enterprise have sold to inland under the form of scrap and declared VAT to tax authorities. However, according to the instructions for the company, scrap formed from both imported raw materials and purchased domestically, the enterprise must allocate and split the selling price of scrap into two parts – the imported part should be declared to customs authorities and the part purchased domestically would be declared to tax authority.

Enterprises asked that, in case of declaring VAT to the Customs authority, does the scrap purchasing unit need to have red invoices?

According to the General Department of Vietnam Customs, Clause 35, Article 1 of Circular 39 amended and supplemented in Article 55 of Circular 38 stipulating the actual production norm is the actual amount of raw materials and supplies used for processing and manufacturing a units of exported products and is determined as complied with the form No.27, Appendix II attached to this Circular.

In the case that scrap and waste products created during the production of previous exported products are used for recycling and manufacturing exported products, the norms of manufacturing an exported product must be set in accordance with the provisions of this Article. (Example: Company A imports tobacco leaves for export production tobacco type 1 and type 2, the manufacture stage is separating leaves to produce tobacco type 1 and stems, then drying, pressing into bricks, sliced ​​to produce tobacco type 2. So, company A must set a norm for tobacco type-1 and type-2 tobacco).

In particular, scrap is material removed during processing and production of export goods that is initial useless and recovered to be raw material for other manufacturing process; waste products are finished products, semi-finished products which are not meet technical standards (specifications, dimensions, qualities), which are excluded in the process of processing and manufacturing export goods and are non-conformity for export.

Clause 49, Article 1 of Circular 39 amending and supplementing Article 71 of Circular 38 stipulated that scrap and waste products obtained during the production of export goods, when sold for domestic consumption, it would be exempt from import duty but it must be declared and paid VAT, excise tax (if any) and environmental protection tax (if any).

Accordingly, enterprises only declare and pay VAT, excise tax (if any), and environmental protection tax (if any) to the customs authority for scrap and waste products generated from imported raw materials and supplies. The company is not required to declare and pay taxes to the Customs authority for scrap and waste products which are created from domestic raw materials.

The distribution and division is conducted by enterprises which are determined based on the actual production norms specified in Article 55 of Circular 38 amended and supplemented in Clause 35, Article 1 of Circular 39 (actual data of source of raw material, imported supplies with domestic sources that are recorded in purchase and sale contracts, inventory delivery voucher, inventory receiving voucher, purchase invoices, payment voucher and other relevant documents for determining the number quantity of scrap and waste products subject to tax declaration and payment to customs authority).

The General Department of Vietnam Customs requested enterprises to re-check the actual production norms, dossiers, books, accounting vouchers, payment documents and relevant documents to serve as a basis for tax declaration and payment for scrap and waste products to the customs authority in accordance with regulations.

Export Mechanical Tools JSC, a company which has exported products in the form of all components imported (10 components/products) and assembled into a completed product for export. The company asked, can a company use the form of export production or not? The products are non-conformity for export (waste products) but it can be sold domestically, and the materials used to produce this product are imported under the form of E31. How does company handle tax for these products?

Regarding this issue, relating to the tax policy for imported goods using for export production, according to the General Department of Vietnam Customs, Clause 7, Article 16 of the Law on Import and Export Duty; Article 12 of Decree 134/2016/ND-CP stipulated that raw materials, supplies, components, semi-finished products and finished products imported to produce exported goods are exempted from import duty. The basis for determining duty-free goods is complied with Clause 2, Article 12 of Decree 134/2016/ND-CP.

Accordingly, the case of enterprise imports all components to assemble into a finished product for export, if it meets the provisions of Clause 2, Article 12 of Decree 134/2016/ND-CP, it is exempted from import duty.

Regarding tax policy for non-conformity products that must be transferred for domestic consumption, the General Department of Vietnam Customs said, at Clause 5, Article 25 of Decree 08 amended and supplemented in Clause 12, Article 1 of Decree 59 stipulating declaration for tax payment of goods changing use purposes. Also in Article 21 of Circular 38, which is amended and supplemented in Clause 10, Article 1 of Circular 39, transferring to domestic consumption or change of use purpose of goods which have completed import-export procedures, would be carried out only after a customs declarant completed customs procedures for new declarations; for goods changing use purposes or transferred for domestic consumption, taxpayers must declare and fully pay tax and monetary penalties (if any) in accordance with regulations.

Article 71 of Circular No. 38 amended and supplemented in Clause 49, Article 1 of Circular 39, scrap and waste products collected during the production of export goods, when sold domestically, are exempted from import duty but it must be declared and paid VAT, excise tax (if any), environmental protection tax (if any).

Therefore, for waste products generated during the production process, which are within the actual norms, in case of destruction, it is not required to declare and pay import tax, and not needed to declare and pay VAT. In the case that after destruction, scrap is still have value in use, the enterprise sells to the domestic market, it must pay VAT in accordance with the law on Value Added Tax.

For non-conformity products for export, enterprises using this product for sale in the country must declare for change of use purpose, pay all taxes for raw materials and supplies that used to manufacture products for domestic consumption.