08:00 01/08/2024

Amendements to the Excise Tax Law under discussion

A July 31 VET dialogue heard from experts on a proposal to increase taxes on alcoholic beverages to curb the negative impact on health and society.

Dialogue on “Ensuring Sustainable Benefits from Revising the Excise Tax Law for Alcoholic Beverages”, organized by Vietnam Economic Times (VET) / VnEconomy on July 31. (Photo: Viet Dung)
Dialogue on “Ensuring Sustainable Benefits from Revising the Excise Tax Law for Alcoholic Beverages”, organized by Vietnam Economic Times (VET) / VnEconomy on July 31. (Photo: Viet Dung)

At a dialogue on “Ensuring Sustainable Benefits from Revising the Excise Tax Law for Alcoholic Beverages”, organized by Vietnam Economic Times (VET) / VnEconomy on July 31, experts in attendance unanimously agreed that updating the Law is both necessary and timely.

The primary goal of excise taxes is to restrict non-essential products or those harmful to human health and the environment. Medical research indicates that excessive consumption of alcoholic beverages, such as liquor and beer, poses certain health risks. The World Health Organization (WHO) also recommends that countries continue to strengthen measures to limit the consumption of such beverages.

However, experts advise that the drafting agency needs to further study consumer psychology and behavior and assess the specific impact of alcohol on public health to design policies that ensure long-term benefits for society.

Avoiding misguided practices

Dr. Dang Thuy Ha, Northern Regional Director at market researchers NielsenIQ Vietnam, highlighted that health and price are among the primary factors consumers consider when making purchasing decisions. Nearly five years after the Covid-19 pandemic, economic recovery remains incomplete, leading to lower incomes and, in turn, more cautious spending.

“In our latest Vietnam Shopper Trends report, over 60 per cent of consumers indicated they would alter their behavior in response to price changes,”  she said. “An increase in price might lead to lower consumption. However, determining the exact price increase needed to reduce consumption requires more detailed research.”

NielsenIQ Vietnam’s data shows that, besides price, consumption behavior is also affected by cultural and regional factors. “When we asked consumers in Ho Chi Minh City how their behavior changed during tough times, they said they would opt for slightly cheaper products while maintaining quantity,” Dr. Ha explained. “In contrast, consumers in Hanoi said they would reduce quantity but stick to the same brand. Even between these two cities, responses vary significantly.”

She emphasized, however, that alcohol consumption is strongly influenced by factors beyond price. “According to Maslow’s ‘Hierarchy of Needs’, alcohol consumption fits into various levels,”  she told the dialogue. “At the basic level, beer is a popular summer beverage. This explains the high summer consumption. At a social level, such beverages facilitate interaction and events. At higher levels, some individuals use expensive or branded alcohol to assert their status. Thus, consumption is an integral part of daily life.”

Professor Hoang Van Cuong, Member of the National Assembly’s Finance and Budget Committee and Vice Chairman of the Vietnam Economic Association, also believes that alcohol is a product with low price sensitivity.

“A product with high price sensitivity would see reduced consumption if taxes and prices rose,” he said. “Conversely, a product with low sensitivity may not experience a decline in consumption if higher taxes were imposed. In some cases, higher taxes may actually lead to unintended effects, such as shifts to cheaper, untaxed products or tax evasion.”

Experts suggested that, according to the “Laffer Curve” theory, reasonable tax increases with effective management can boost revenue. Excessively high taxes, however, may indeed result in revenue losses due to tax evasion and a shift to untaxed products, and make it more challenging for legitimate businesses to compete.

Differences in liquor and beer taxes

Experts at the dialogue pointed out a paradox: despite its significantly higher alcohol content, liquor is taxed at a lower rate than beer.

Under existing excise tax regulations, liquor with 20 per cent alcohol or more is taxed at 65 per cent, while liquor under 20 per cent is taxed at 35 per cent. All beer, meanwhile, is taxed at 65 per cent.

The typical alcohol content of domestic beer (excluding craft beer) ranges from 4 to 5 per cent, with low-alcohol or non-alcoholic beers generally containing between 0.05 and 1.2 per cent alcohol. Craft beers can reach as high as 12 per cent alcohol content, but there are regulatory gaps for this particular segment.

Experts argue that it is crucial to differentiate between the health impacts and economic contributions of liquor and beer to create effective policies. “Alcohol’s health effects vary by type and concentration, making it essential to avoid treating all alcohol as equal,” said Dr. Ha. “Additionally, tax policies should discourage the use of unregulated products that pose direct health risks.”

Ms. Dinh Thi Quynh Van, Chairwoman of PwC Vietnam, noted that Vietnam’s situation is unusual, with lower excise taxes on liquor compared to beer, despite the former’s much higher alcohol content, which by definition means it poses a more direct health hazard.

Liquor shares many characteristics with drugs, including a high potential for addiction and severe societal consequences, Dr. Nguyen Trung Nguyen, Director of the Poison Control Center at Hanoi’s Bach Mai Hospital, highlighted. Specifically, unregulated and craft liquor, which lack quality control, lead to significant health problems, fatalities, and higher public health costs than all other drugs combined.

Experts emphasize that the State budget faces substantial losses due to the inability to control the formal liquor market and the prevalence of illegal and craft liquor. Thus, international practice suggests taxing the harmful component - alcohol content - when designing tax policies for alcoholic beverages.

It is essential for Vietnam to conduct a thorough evaluation of the health impacts of each product, be it liquor or beer, and their effect on the production - trade - service value chain. Such a detailed assessment is crucial for stakeholders to develop effective policies that ensure sustainable benefits for society.

 

The Ministry of Finance (MoF) is currently soliciting public feedback on a draft amendment to the Law on Excise Tax, which will be reviewed during the 8th session of the 15th National Assembly in October and potentially be approved at the 9th session next May. The draft introduces several noteworthy changes that could significantly impact the beverage industry, especially alcoholic beverages.

The proposed amendment suggests a gradual increase in the excise tax for alcoholic drinks by 2030. This proposal has garnered considerable interest from both the public and industry stakeholders.

Specifically, the Ministry plans to implement the tax increase starting in 2026, when the revised Law is expected to take effect. The proposed changes are based on recommendations from WHO to raise the price of alcoholic beverages by at least 10 per cent. Two options are under consideration for the annual tax increase from 2026 to 2030:

- Option 1: In 2026, a tax rate increase of 5 per cent above the current rate that would result in a 10 per cent increase in product prices compared to 2025.

- Option 2: In 2026, a tax rate increase of 15 per cent above the current rate that would lead to a 20 per cent rise in product prices compared to 2025. The MoF currently supports this option.

Under both options, the Ministry proposes an additional 5 per cent annual tax increase over the following four years, resulting in a 2-3 per cent rise in product prices each year to align with inflation and rising incomes.

By 2030, the excise tax on beer and liquor with over 20 per cent alcohol content would rise to 90-100 per cent, or 25-35 per cent higher than the current rate, while liquor under 20 per cent alcohol content would increase to 60-70 per cent, also 25-35 per cent higher than the current rate.

Following the Ministry’s proposal, the Vietnam Alcohol - Beer - Beverage Association (VBA) and other industry players expressed concern. They pointed out the ongoing challenges to the industry since the Covid-19 pandemic and have urged the MoF and relevant authorities to thoroughly assess the impact on all stakeholders before finalizing the policy.

While the VBA and beverage producers agree on the need for an excise tax increase, they call for a more moderate increase and a more gradual implementation timeline than what the MoF has proposed.