Vietnam's Economy

Will the VAT reduction in Vietnam achieve its goal? A critical-optimistic analysis

It has been almost two months since Vietnam implemented a VAT reduction from 10% to 8% with Decree No. 15/2022/ND-CP - together with the CIT-Deductions for Companies. The VAT move is a temporary reduction to be applied from 1/2 to 31/12/2022. The objective is to drive the recovery of the economy in the post-Covid19 time. For each individual order, the reduction may be small, but it has a huge effect when stimulating purchase demand.

VAT cuts covered goods in the import, manufacturing, processing, and trade sectors. Others such as banking and telecommunication services, metals, real estate, and IT services were exempted. In total, this measure will cost the national budget roughly VND 49.4 trillion (about USD 2.2 billion) which is one-third of the recorded loss of Germany in the surprise VAT-tax cut at the end of 2020. This is the second time Vietnam has resorted to this measure after the global financial crisis in 2009. Consumers will experience this VAT reduction in their daily lives, especially at supermarket checkouts and when shopping in larger shops. However, it will have less effect at traditional markets and street shops, where VAT invoices are often not issued.

It can be seen that the policy has initially shown positive effects. However, it is important to be on the lookout for hazards. The government should still be cautious and pay attention to the experiences of countries that have used this measure to help the policy achieve its goals.

Lessons learned from Germany

In Germany, in the wake of the Corona crisis, there was an even higher VAT cut from 19% to 16% on most goods from 1/7/2020. This was supposed to give consumption and thus the economy a new boost. But when this temporary measure ended on 31.12.2020, the result was sobering. The reason was that Germany's very radical lockdown policy had left many companies in distress and not all of them had passed on the VAT reduction to their customers. Thus, in some cases, the gross price remained the same. Furthermore, there was also an increase in inflation, which amounted to 7,3 % in March 2022.

Impact through the psychological effects on people

On a bill of 1 million VND when shopping in a supermarket, this reduction amounts to only 20,000 VND. At first glance, this may seem negligible. But a strong impact can be generated in Vietnam through the psychological effects. Especially citizens in need, but also everyone else, get the feeling that their concerns are taken seriously by the government. Consumers can see the reduction directly on their bills. This human-psychological dimension should by no means be neglected. It can encourage consumers to buy more so that companies might not suffer from the increased demand.

Overall, the VAT reduction in Germany was not completely passed on to consumers, but according to the think-tank IFO, it was nevertheless about 2/3 of the reduction. What was much more serious, however, was the fact that - albeit to a lesser extent - the savings for consumers were not turned into higher consumption by them. According to a report in the German magazine "DIE ZEIT" of 4/1/2021 and other newspapers, the reduction in VAT simply missed its target. Consumers were too reluctant to spend, some of whom saw uncertain prospects for the future.

For Vietnam, however, the situation is different, although the government should be cautious and take into account experiences from other countries. The bouncing effect of VAT tax cut is possible to trigger right after the end of the preference.

In summary, the VAT reduction was an important step for Vietnam. However, it must go hand in hand with a real recovery of the economy. This includes an end to all Corona-related restrictions, including the irreversible opening of the country. Fortunately, the country's policies have made the threat of the virus manageable. Now it is a matter of recovering the economy. In this context, one can be optimistic: Monetary and fiscal measures have so far been prudent and have not diminished the capacity of the SBV and the government to act. It is to be hoped that Vietnam will not turn to excessive debt policies (Modern Monetary Theory). Vietnam's liberal economic policy, which manifests itself in many Free Trade Agreements and investor-friendly policies, will help the country reposition itself.

(The article is published in Vietnamese in the Vietnam Financial Times, at: https://thoibaotaichinhvietnam.vn/giam-thue-gia-tri-gia-tang-2-co-the-n…)