VAT reduction extended

Vietnam’s National Assembly recently approved an extension of a significant fiscal policy. We are talking about the 2% reduction in value-added tax (VAT), applicable to a whole range of goods and services. The policy was first applied in 2022, and has now been extended until the end of June 2025. The decision provides relief to both businesses and consumers. It is part of the Government’s ongoing efforts to stimulate the economy, mitigate inflationary pressures, and bolster domestic consumption.

The VAT reduction affects a wide range of goods and services that were previously subject to a 10% VAT rate. Which means that the applicable VAT rate for those goods and services is effectively only 8%. The policy aims to reduce input costs for businesses, and to help keep prices more affordable for consumers. By targeting sectors such as retail, manufacturing, and services, the Government is hoping to support economic recovery and promote job creation. Particularly in the wake of global uncertainties and slower recovery of major trade partners.

VAT in the Vietnamese tax system

Value-added tax is a key component of Vietnam’s tax system. It applies to goods and services that are used for production, trading, and consumption. VAT applies to each stage of the production and distribution process, with businesses able to claim credits for value added tax paid on their inputs. The standard VAT rate is 10%, but there are exceptions and special provisions for certain goods and services.

For example: a VAT rate of 5% applies to essential goods and services, such as clean water, medical equipment, and agricultural products. There are goods and services that are subject to a 0% VAT rate, for example certain goods produced for export. And there are goods and services, such as education and healthcare, which are exempt from VAT altogether. To be clear, the 2% VAT reduction does not apply to goods and services that were originally subject to a VAT rate of less than 10%.

Key points of the VAT reduction

• Duration: the 2% VAT reduction extension will be in effect from 1 January 2025 until 30 June 2025. After this, the reduction may be extended agains, as has already happened several times in the past.
• Applicable Goods and Services: the reduction applies to a wide range of goods and services, including:
  • Aviation services,
  • Transportation services,
  • Tourism services,
  • Accommodation services,
  • Catering services,
  • Education and training services,
  • Agriculture, processing, and manufacturing, and
  • Social housing.
• Exclusions: certain goods and services, such as telecommunications, financial services, and real estate, are excluded from the reduction.

VAT reduction and consumer behavior

One of the primary goals of the extended VAT reduction is to encourage domestic consumption. And indeed, the 2% VAT reduction directly lowers the prices of goods and services for consumers, making them more attractive. As a result, consumers may feel more inclined to spend, especially on everyday goods and services that have a 10% VAT rate. This, in turn, could lead to a boost in demand across other fields of the economy.

Sectors such as retail, automotive, and consumer goods may benefit the most from the extended VAT reduction. Retailers, for instance, can pass on the savings to consumers in the form of lower prices, potentially increasing their sales volume. Similarly, manufacturers can reduce their production costs, allowing them to offer competitive prices without sacrificing profitability. This could lead to higher consumer spending, particularly on durable goods like electronics, automobiles, and home appliances.

The automotive industry is another key sector expected to benefit from the extended VAT reduction. With reduced tax burdens on production and sales, car manufacturers can offer more affordable options to consumers. This could stimulate demand for both domestic and imported vehicles. Leading to a boost in sales and more competition in the market. Similarly, the reduction in VAT on services such as transportation, hospitality, and entertainment could encourage greater consumption in these sectors. Naturally, if people feel the impact of lower costs, they may be more willing to travel, dine out, or enjoy leisure activities. All of which would have positive knock-on effects on Vietnam’s economy.

VAT reduction benefits for businesses

For businesses, the extended VAT reduction provides a financial cushion, particularly in sectors with tight margins. The lower VAT rate reduces input costs, allowing businesses to lower their prices or improve their profit margins. In sectors such as manufacturing, where production costs are a key concern, the VAT reduction can help ease pressure on companies. This in turn will allow them to maintain competitive pricing without absorbing the full cost of higher taxes.

This fiscal measure also supports businesses in managing their cash flow. By reducing the VAT rate on their purchases and inputs, companies can better manage their operating costs. And they can reinvest the savings into expanding their businesses, hiring more workers, or improving their products and services.

Additionally, businesses may use this opportunity to rethink their pricing strategies. With the extended VAT reduction in place, companies could use the tax savings to launch promotions. Or for example offer discounts, or run loyalty programs, all of which could boost customer retention and brand loyalty. For small and medium-sized enterprises (SMEs), the tax break may provide the breathing room needed to stabilize operations and plan for future growth.

Financial implications for the Government

While the extended VAT reduction offers clear benefits to businesses and consumers, it does come with fiscal costs. The Vietnamese Government estimates that the extension of the VAT reduction will reduce the state budget revenue by approximately VND 26.1 trillion (about US$1.03 billion). This is a significant amount. However, the Government has expressed its commitment to balancing the budget by ensuring that revenue from other sources will cover any shortfalls. The Government has therefore tasked itself with ensuring the continuity of essential public services and maintaining macroeconomic stability. This includes keeping inflation in check and ensuring that the country’s development goals are met despite the reduction in tax revenue.

Some tips for business owners

Importantly, businesses must ensure they comply with the new tax regulations. Companies are required to clearly state the reduced VAT rate on invoices and maintain proper records. For businesses using the deduction method for VAT reporting, they will need to accurately report the applicable VAT rate. So it is recommendable to check carefully which of your goods and services are eligible for the extended VAT reduction.

Furthermore, businesses in Vietnam would do well to adapt to the new VAT regime by reviewing their pricing strategies, supply chains, and financial planning. The extended VAT reduction provides a significant opportunity to reduce operating costs. But it also requires careful planning to ensure compliance with the new regulations.

Finally, businesses could monitor their customers’ behavior closely in response to the VAT reduction. As consumer spending increases, companies may need to adjust their inventory management and production schedules to meet rising demand. The ability to respond quickly to changes in the market will be critical to gaining a competitive advantage in the months ahead.

Conclusion

The extension of the 2% VAT reduction is part of a broader effort by the Vietnamese Government to use tax policies as a tool for economic stimulus. By temporarily lowering the VAT rate, the Government aims to boost consumer spending, support businesses, and ensure economic stability during challenging times. While the VAT reduction presents some financial challenges for the Government, its long-term benefits for the economy are expected to outweigh these costs From a business- and consumer perspective, it is expected that the extended VAT reduction will reduce costs, stimulate consumption, and support economic growth. Meanwhile, businesses must remain vigilant to ensure compliance with the new tax regulations in order to make the most of the extended VAT reduction.

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