VAT reduction of 2% in Vietnam, applicable from 1/1/2024

The Government issued Decree 94/2023/ND-CP stipulating the policy of reducing value added tax according to Resolution No. 110/2023/QH15 dated November 29, 2023 of the National Assembly. The goal of this policy is to promote economic recovery. For each individual order, the reduction may be small, but it has a huge effect in stimulating purchasing demand.

1. One million VND bill reduced by 20 thousand VND, seemingly small but not small

The 2% VAT reduction adjustment Decree takes effect from January 1, 2024 to June 30, 2024, applicable to goods in the fields of import, production, processing and trade…

This is the second time Vietnam has used this policy after the global financial crisis in 2009. With this policy, consumers will receive a reduction in VAT on daily expenses, especially when paying at supermarkets and when shopping at large stores. However, this decision will be less effective in traditional markets and street shops, where VAT invoices are not usually issued.

Vietnam Extends 2% VAT Reduction Until End of 2024

It can be seen that the initial policy has shown positive effects. However, it is important to guard against risks. The government should still be cautious and pay attention to the experience of countries that have applied this measure to help the policy achieve its goals.

2. Value added tax reduction level

Specifically, VAT reduction for groups of goods and services currently subject to a tax rate of 10%, except for the following groups of goods and services:

2.1 Telecommunications, financial activities, banking, securities, insurance, real estate business, metals and prefabricated metal products, mining products (excluding coal mining), coke, refined petroleum, chemical products.

2.2. Goods and services subject to special consumption tax Information technology according to the law on information technology.

VAT reduction for each type of goods and services is applied uniformly at the stages of import, production, processing, and commercial business. For coal products sold (including coal mined and then screened and classified according to a closed process before being sold) are subject to VAT reduction. Coal products listed in Appendix I issued with this Decree, at stages other than the mining stage, are not entitled to a reduction in value added tax.

New tax policies applicable from January 01, 2024

Corporations and economic groups that implement a closed process before selling are also subject to a reduction in value added tax on coal products sold. In cases where goods and services are not subject to value added tax or are subject to a 5% value added tax according to the provisions of the Law on Value Added Tax, the provisions of the Law on Value Added Tax shall apply and the value added tax shall not be reduced.

Business establishments that calculate value added tax according to the deduction method shall apply a value added tax rate of 8% to the prescribed goods and services.

Business establishments (including business households and individual businesses) calculating value added tax according to the percentage method on revenue are entitled to a 20% reduction in the percentage rate for calculating value added tax when issuing invoices for goods and services eligible for reduced value added tax.

3. Lessons from Germany

In Germany, after the crisis caused by the Covid-19 pandemic, the VAT cut was applied even higher, from 19% to 16% for most goods from July 1, 2020. This was expected to bring about consumption growth and thus economic growth. But when this temporary measure expired on December 31, 2020, the situation became even more serious. The reason is that Germany’s very strict embargo policy has put many companies in a difficult situation and not all of their service providers have actually reduced VAT for customers. As a result, in some cases, the final price of goods and services remains the same. Furthermore, while inflation is still rising, reaching 5.1% in February 2022, coupled with a zero interest rate policy, this decision has led to a loss of value for people’s savings. Overall, this remains a challenge for the German economy.

In general, the reduction in VAT in Germany has not been passed on to consumers, and according to the Ifo Institute for Economic Research, the reduction is only about two-thirds of the prescribed level. However, the important issue is that in reality, the money that consumers save is not used by them to spend more.

However, for Vietnam, the situation is different, although the Government should still be cautious and pay attention to the experience of countries that have applied this measure. The strong impact of VAT cuts may appear immediately after the preferential rates end.

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