Unintended consequences from increasing excise tax

The Ministry of Finance (MoF) has proposed draft amendments to the Law on Excise Tax, recommending that such taxes be applied to all alcoholic beverages, fermented food made from fruit and grains, and mixed drinks containing food-grade alcohol. The draft will be submitted to the National Assembly for discussion during its eight session, scheduled for October.

Pros & cons

Two options have been proposed on adjusting the excise taxes on beer and spirits.

Option 1: The excise tax on beer and on spirits over 20 per cent alcohol by volume (ABV) would rise to 70 per cent in 2026, 75 per cent in 2027, and continue to increase by 5 per cent annually until reaching 90 per cent in 2030. For spirits under 20 per cent ABV, the tax rate would increase to 40 per cent in 2026 and continue to rise by 5 per cent each year, reaching 60 per cent by 2030.

Option 2: The excise tax on beer and on spirits over 20 per cent ABV would increase to 80 per cent in 2026, with a 5 per cent annual increase up to 100 per cent by 2030. For spirits under 20 per cent ABV, the tax would be 50 per cent in 2026, rising by 5 per cent each year to reach 70 per cent by 2030. The MoF leans towards Option 2.

During the Draft Law on Excise Tax (Amendment) and the Beverage Industry seminar organized on August 8 by the Vietnam Chamber of Commerce and Industry (VCCI) and the Vietnam Beer - Alcohol - Beverage Association (VBA), Dr. Can Van Luc, Chief Economist at the Bank for Investment and Development of Vietnam (BIDV), President of the BIDV Training and Research Institute, Member of the National Fiscal and Monetary Policy Advisory Council, and Member of the Vietnam National Committee for Pacific Economic Cooperation (VNCPEC), discussed how the global economic downturn, slow post-Covid-19 recovery, and various international business risks are significantly impacting Vietnam given its open and deeply-integrated economy.

From 2020 to 2024, businesses in the country have experienced uneven levels of recovery, with many facing challenges such as an unsustainable recovery in orders and labor shortages. The beverage industry faces its own unique difficulties, including no access to support cutting VAT rates by 2 per cent and the impact of Decree No. 100/2019/ND-CP on alcohol concentration violations. Costs for key materials have also risen 15-40 per cent, and issues such as smuggling and counterfeit products remain complex. Changes in lifestyle and consumer behavior also require that the industry continually adapt.

Average profits in the beverage industry have been on a downwards trajectory in recent times, falling 12 per cent year-on-year in 2021, 6 per cent in 2022, and an estimated 10-12 per cent in 2023. Industry revenue declined by an average of 10 per cent each year from 2020 to 2023. Inventory levels continue to rise, with a 29 per cent year-on-year increase posted in the first half of 2024, while stock prices are falling. Major industry players have reported both lower revenue and profits.

Dr. Luc believes that while the amended Law on Excise Tax could boost State budget revenue in the short term, it may also cut consumer demand and business revenue and profits in the medium to long term, potentially lowering VAT and corporate income tax revenue. Thus, the overall impact of the amendments on tax revenue is uncertain.

“Increasing taxes on sugary beverages may not necessarily reduce obesity and cardiovascular diseases, due to other contributing factors, and thus may not ease the financial burden on the healthcare budget,” he added. He also noted that raising excise taxes on sugary drinks might not effectively target the desired consumer behavior changes and could lead to increased consumption of other beverages, potentially exacerbating health issues like obesity and cardiovascular disease.

A rapid and significant tax increase on alcoholic beverages could impact long-term revenue contributions and create additional challenges for businesses and workers in the industry, as well as related sectors such as packaging, transportation, tourism, and food service. Moreover, the draft amendments may treat beverages with different alcohol content uniformly and complicate the regulation of consumer behavior.

Suitable roadmap required

Mr. Dau Anh Tuan, Vice Secretary-General and Director of the Legal Department at VCCI, emphasized that tax laws are crucial for various sectors, and the beverage industry faces a significant impact from this draft proposal. While fulfilling tax obligations is essential, rates must be fair, justified, and aligned with business effectiveness.

“The proposed tax rates need a well-planned roadmap to ensure business stability,” he pointed out. “Policies should be based on sound arguments, scientific evidence, and a broad perspective. While the aim is to increase budget revenue, we must consider whether this will cut consumption and positively affect public health, but also negatively affect employment and industry competition.”

Agreeing, Dr. Luc emphasized the need to clarify the objectives of the tax increase, whether it is intended to raise revenue or regulate consumption. The principles, responsibilities, and feasibility must be carefully considered, with a thorough evaluation of scientific and practical matters. Revenue sources should be diversified but not excessively exploited, and need to be nurtured.

Dr. Luc recommended a detailed and comprehensive impact assessment to choose the most appropriate of the two options on offer given Vietnam’s economic context, balancing the interests, responsibilities, and feasibility for the State, businesses, and consumers. The actual rates, timing, and increase roadmap should be fully calculated to avoid creating additional difficulties or unintended effects such as opening legal loopholes or encouraging shifts to more harmful products.

Additionally, taxes should be based on factors such as alcohol content and sugar levels to prevent a one-size-fits-all approach. Both absolute and mixed tax calculation methods should be considered instead of only relative taxation. It is also important to review and ensure alignment with related laws, such as the Law on the Prevention and Control of Alcohol-Related Harms, the Law on Value Added Tax, the Law on Advertisements, the Law on Product and Goods Quality, and the Law on Environmental Protection.

From a business perspective, Ms. Tran Ngoc Anh, Director of Corporate Affairs at Heineken Vietnam, proposed a tax increase level and timeline. She suggested maintaining a 65 per cent tax rate on beer for the first three years after the amended Law on Excise Tax takes effect, followed by a single increase after three years, not exceeding 3-5 per cent.

Furthermore, based on the “Laffer Curve” theory, she noted that exceeding the optimal tax rate could negatively impact revenue goals due to reduced sales. For instance, in Belgium, the government increased the excise tax on spirits by over 40 per cent in November 2015, aiming to raise an additional €128 million ($139.8 million) in the first half of 2016. However, due to a 33 per cent decline in sales as spirit prices rose over 20 per cent, government revenue did not increase. Consumers instead shifted to purchasing spirits in Luxembourg or northern France, where sales doubled. Similarly, in the UK, a tax increase on alcohol in early 2023 led to a 20 per cent fall in sales and a £108 million ($137.7 million) reduction in tax revenue within six months. Further planned tax increases were shelved at the end of 2023.

According to Ms. Anh, the existing tax structure lacks consistency. The impact of alcoholic beverages is related to their alcohol content, so excise taxes could be used as a tool to regulate and encourage the production and consumption of lower-alcohol products to safeguard consumer health.

Thus, it is more practical to establish specific tax rates for different alcohol content levels. Other countries recommend this approach, with higher taxes on spirits compared to beer due to their greater harm. This aligns with existing regulations in the Law on the Prevention and Control of Alcohol-Related Harms and the Law on Advertisements, which categorize beer into three groups based on alcohol content: under 5.5 per cent, between 5.5 per cent and 15 per cent, and over 15 per cent.

Ms. Anh proposed a 65 per cent tax rate for beer with an alcohol content of 5.5 per cent or less, with incremental increases for higher alcohol levels. This should also be coupled with responsible drinking campaigns and a differentiated tax structure to encourage innovation, production, and consumption of lower-alcohol products, ensuring fairness and consistency between different alcoholic beverages.