Calculating excise taxes on alcoholcise

Introduced in 1990 and amended 12 times since, the Law on Excise Tax has continued to apply a percentage-based tax method (also known as relative taxation), wherein the basis for calculating taxes is based on the value of goods subjected to the tax and the applicable tax rate. This law currently applies to 17 types of goods and services, including alcoholic beverages, which are discouraged consumption items due to their potential health risks and severe social consequences.

Raising taxes to guide consumption

Looking back at 34 years of implementing the Law on Excise Tax, Ms. Nguyen Thi Cuc, Chairwoman of the Tax Advisory Council in Vietnam, said the tax on alcoholic beverages has undergone many changes and forced businesses to think about evading laws. There were times when alcohol was divided into several types based on alcohol content, such as above 40 degrees or between 30 and 40 degrees, below 30 degrees, or charged according to the type (fruit liquor, medicinal liquor, for example). For beer, there have been periods where it was separated into different categories of fresh beer, bottled beer, and canned beer, with different tax rates. There were times when canned beer did not deduct the can from calculations.

“In some periods, domestic liquors were exempt from tax on bottles and packaging containers,” said Ms. Cuc. “So, liquor producers sold their products without bottle caps, allowing customers to buy them separately because, at that time, the bottle cap was subjected to value added tax but not Excise Tax, whereas imported liquors had to pay both taxes for the bottle cap and the wine itself. The Hanoi Liquor Joint Stock Company, formerly known as French Fontaine Liquor Factory, came up with an innovative idea when selling its 39.9 degree alcoholic beverage. At that time, wines above 40 degrees were subject to a 70 per cent Excise Tax, while those between 30 and 40 degrees faced lower rates of 55 per cent.”

According to Ms. Nguyen Minh Thao, Head of Environmental Business Research and the Competitiveness Department at the Central Institute for Economic Management (CIEM) and an expert on tax policies, there were previously many different types of goods with varying levels of taxation, which led companies to evade laws through various methods. Given the complexity of taxes, Ms. Thao believes that adjustments need to be made so that businesses can easily comply with regulations. Tax reform is an inevitable trend and we cannot use old management tools for new development.

As of now, under the Law on Taxation No. 70/2014/QH13, which has been effective since January 1, 2016, alcoholic beverages have been categorized more uniformly and have clear tax increase plans. After officially implementing a common tax rate for beer, the tax rate has also been adjusted gradually over time, from 45 per cent in 2010 to 65 per cent from 2018 onwards.

Similar to alcoholic beverages, tax rates on both types have also increased over time. For low-alcohol drinks with an ABV below 20 per cent, the rate increased from 25 per cent in 2010 to 35 per cent, whereas high-alcohol drinks above 20 per cent saw their tax rate rise gradually from 45 per cent to 65 per cent.

Thanks to this policy, taxes not only guide consumption and reduce the use of products detrimental to the health, but also contribute significantly to State budget revenue. Data from the Ministry of Finance shows an increase in the proportion of Excise Tax revenues out of total national income each year, from 9.95 per cent in 2018 to around 12.4 per cent in 2022. In 2022, Excise Tax revenues reached over VND130 trillion ($5.34 billion), accounting for more than 12 per cent of the country’s overall budget. Among all Excise Tax revenues, beer tax revenues in 2022 amounted to VND55.3 trillion ($2.27 billion), reaching the highest level in the period between 2018 and 2022.

Alcoholic beverage products were subject to an increased Excise Tax from 2016 to 2018, but many opinions argue that Vietnam still remains a “powerhouse” for alcohol and beverages due to increasing consumption rates, with significant negative consequences on public health and society. Moreover, according to calculations, the current tax rate for alcoholic beverages in Vietnam is relatively low at around 30 per cent of retail prices compared to higher rates ranging between 40-85 per cent in other countries.

The relative tax method has been applied for 34 years with an increasing rate, applied to selling prices and service provision costs, so products with a higher sales price must pay more Excise Taxes. From the perspective of market regulation, calculating taxes based on percentage rates will create relatively fair conditions between different product groups in the market because consumers are willing to pay what they want to pay, which also contributes to adjusting consumption correspondingly with income level.

Applying a variety of tax calculation methods

According to experts, relative taxation has become outdated due to its unequal treatment of high-quality products and low-quality products, and from a certain perspective may even encourage manufacturers and consumers to use cheaper products with higher alcohol concentration. This is one of the main reasons why this current approach based solely on selling price is not popular in many countries. Therefore, transitioning to other methods of tax calculation, combined with appropriate policies, needs to be considered in the future to effectively manage and collect taxes for the alcoholic beverage industry in Vietnam.

A key feature in the proposed draft law on Excise Tax Reform (amended) this time has been receiving public attention: an additional proposal for tax calculation based on the absolute taxation method and mixed taxation method alongside the existing relative taxation method applied previously in Vietnam.

The mixed taxation method is considered to combine the advantages of both methods, but combining these can lead to more complex calculations and higher management costs. However, it may be able to prevent people from starting to use alcoholic drinks and increase government revenue.

Regarding the current tax reform on special consumption items, Ms. Thao suggests that with technical details about calculation methods for taxes, drafting authorities need wide consultation with relevant parties.

Reforming tax policies should be consulted on and updated to align with international trends and practices, balancing between production, consumption, revenue sources, healthcare goals, economic development, revenue generation, and other social issues. As each agency has its own reasoning, it requires comprehensive evaluation rather than focusing on narrow perspectives.

Regarding alcoholic drinks specific taxes (ADST), research suggests applying various methods for calculating ADST and switching from one method to another needs an appropriate transition period. Building and adjusting tax policy, including ADST, which targets alcoholic drinks, necessitates broad public input and consensus building to avoid negative consequences during implementation.

The CIEM representative also emphasized that based on Prime Ministerial Decision No. 508/QD-TTg approving the Strategy for Tax System Reform, the tax policy perspective is to complete the system holistically, contributing to improving the investment climate and encouraging business growth. When changing tax rates, shifting calculation methods, or altering policies, stability and consistency need to be ensured to drive enterprise development.