Vietnam’s complex VAT system gets a makeover

Tax

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Simplifying one of the most complex value-added tax (VAT) systems is a challenge researchers from Monash University have taken up with relish. And what they have come up with has been published in the prestigious Journal of Asian Economics.

Monash University researchers, Drs James Giesecke and Tran Hoang Nhi from the Centre of Policy Studies, Faculty of Business and Economics have developed a framework for economy-wide modelling of value-added tax (VAT) systems.

“The Vietnamese VAT system is arguably among the most complex in South East Asia. Six countries in this region have a VAT system, but only Vietnam’s VAT system has more than two rates,” Dr James Giesecke said.

“It was important that while looking at ways to simplify the VAT system, the resulting framework had to maintain the government’s tax revenues and its poverty objectives.”

The VAT was introduced in 1999. Initially, it was levied at four different rates of zero, five, 10 and 20 per cent, with many discretionary exemptions. Since then, the government has simplified it further, reducing the number of rates to three (zero, five and 10 per cent), and decreasing the number of discretionary exemptions, however it is still relatively complex.

“It is generally known that the more complex a tax system, the higher the costs to the economy,” Dr Tran said.

“A complex system creates anomalies in production and consumption by distorting relative prices. It also adds to the compliance and enforcement burden. For example, businesses producing both VAT and VAT-exempt goods have to distinguish inputs used to produce VAT goods from those used to produce VAT-exempt goods, because only the VAT paid on the former can be reclaimed from the tax authorities.

“By using a dynamic comprehensive analytical model of the Vietnamese economy we were able to work out a VAT tax regime that would give the Vietnamese government the same revenue while improving economic efficiency and reducing tax collection costs.”

Drs Giesecke and Tran used their model to investigate a core VAT simplification program in which all discretionary exemptions are removed, and all VAT rates on non-exports equalised at a single revenue-neutral rate - 8.3 per cent. This delivered real consumption gains in the order of 0.25 per cent per annum.

“As rice is the staple food in Vietnam, we also investigated an alternative tax regime that excluded rice from our otherwise general program of VAT simplification. The revenue-neutral uniform tax rate becomes slightly higher, at 8.5 per cent,” Dr Tran said.

“Poorer households wouldn’t be disadvantaged as they would be under our core simulation of comprehensive rate equalisation and exemption removal. The real consumption gains would be only slightly lower at 0.23 per cent per annum.”

By developing the model, Drs Giesecke and Tran now have the perfect tool to further assist in the analysis of other policy issues in Vietnam.