Dr. Pham Thi Thanh Xuan, representative of the University of Economics and Law research group, said that reducing VAT would create motivation for the economy after many months of being “compressed”.

With Ho Chi Minh City planning to gradually reopen the economy after September 15, the Expert Group of the University of Economics and Law and the Research Institute for Banking Technology Development, Vietnam National University Ho Chi Minh City proposed to reduce value added tax (VAT).

Dr. Pham Thi Thanh Xuan, lecturer at University of Economics and Law, representative of the research team shared with VnExpress about the advantages and disadvantages of this fiscal solution.

– Why did the research team make this proposal, especially when many fiscal solutions to support businesses and people have been implemented?

– We think that each support package will work for a certain period, for certain goals. The implemented fiscal solutions are really effective when deployed, focusing more on support to stabilize, prioritizing ensuring people’s livelihood over the past time.

But it’s time to talk about the “reconstruction” phase. It is necessary to design parallel support packages, overlapping, with the ultimate goal of bringing the economy back, at least equal to the previous natural capacity.

At this stage, consumer demand stimulation is a very necessary factor in the context that the economy has slowed down after more than 100 days of separation at many levels. Stimulating demand through reducing the VAT rate for consumers and extending the time to pay VAT for businesses will bring out the best benefits when the economy opens up step by step.

Ms. Pham Thi Thanh Xuan – lecturer at Ho Chi Minh City University of Economics and Law. Photo provided by the character

– How do you and the research team expect the impact of this stimulus?

– It is expected to bring positive effects in the short term. For consumers, the demand-stimulating effect appears clearly when the price of goods decreases thanks to the reduction of tax rates. Price determines consumer psychology and behavior. Falling prices help boost consumers’ willingness to spend, gradually getting rid of the cautious spending mentality during the lockdown period.

For businesses, this policy brings double benefits. First, lowering tax rates helps increase sales. Secondly, delaying and extending the time to pay value added tax into the budget helps businesses have more capital, support liquidity in a stable time. From a financial perspective, extending the time to pay value-added tax is essentially allowing enterprises to occupy the budget capital for a period of time, possibly monthly, quarterly depending on the declaration file and according to the budget. extension policy.

For the economy, the reduction of value-added tax creates a positive response on consumption, investment and labor supply, leading to an increase in output. This has been observed from the experience of many countries after the Covid-19 wave in 2020, typically Germany and China.

For example, in 2020, Germany has reduced value added tax in the last 6 months of the year. The cuts are from 19% and 7% to 16% and 5%, respectively. As a result, the German Economic Advisory Council indicated that GDP in 2020 increased by 0.3 percentage points thanks to the above policy.

But what are the “side effects” of this dose?

– The most obvious consequence is a significant reduction in budget revenue, putting a lot of pressure on local budgets. Value-added tax contributes nearly a quarter of total state budget revenue. Furthermore, the effect of tax rate cuts is short-lived and diminishes over time.

Tax is always a difficult tool to use, must be carefully considered. Observed from world experience, some disadvantages have been revealed. Many countries were unable to raise the tax rate back to the old level, but had to extend the time to apply the reduction policy due to the prolonged and recurrent epidemic, the latter wave being more serious than the previous one.

At the same time, the demand-stimulating effect from the massive reduction in value-added tax rates appears to be concentrated in the middle and high-income areas, accounting for the majority of consumption in the economy. Low-income people already benefit from the consumption of essential goods, which already have very low tax rates.

Another disadvantage is that the tax rate range for Vietnam to reduce is not wide. The VAT rate of most countries in the world is quite high, above 15%, while in Vietnam it is 10% for the general population and 5% for essential items, 0% for many items that encourage consumption.

In the study “Creating a driving force for economic recovery in Ho Chi Minh City during the 4th Covid-19 period”, our team proposed 3 options to reduce VAT for the Government to consider.

Firstly, 50% reduction of value added tax, regardless of business sector and size, is estimated at 166,000 billion VND. Second, a 30% reduction in value-added tax, regardless of business sector and size, is estimated at 100,000 billion VND. And the third is a 30% reduction in value added tax except for less vulnerable sectors such as telecommunications, electricity, water, securities, banking – insurance, with an estimated package size of VND 66,200 billion.

However, these disadvantages can be controlled if the policy is designed with a specific response plan.

Stores on Hang Dao Street (Hanoi) were closed because of the implementation of social distancing in July. Photo: Giang Huy

– As she said, the pressure on the budget is huge when using this fiscal measure. So how will our results compare to such a budget reduction trade-off?

– On the basis of assessing the ability to balance the budget and ensure the effectiveness of implementation, we propose that the Ministry of Finance should prioritize the plan regardless of business fields and sizes with a reduction of 30%. At the same time, the time to apply the tax reduction policy is short-term, we recommend a maximum of 6 months.

Such a reduction in tax rates is large enough to have a stimulating effect on demand. The period of 6 months is just enough to maintain the demand-stimulating effect, and it is also suitable in the ability to balance the budget. It is estimated that the reduction in revenue will be equivalent to 5.25% of total state budget revenue.

In order to reduce pressure on budget revenue, some countries have applied selective tax reduction, but this is not necessarily suitable for Vietnam. If tax reduction is selective, it will generate huge operating and management costs. If applied exclusively to epidemic-affected localities, there is a potential risk of tax shifting geographically, not to mention other forms of tax avoidance and tax evasion.

In our opinion, the benefits are indirect but can be much larger than the budget sacrifice.

For example, the sooner consumer demand increases, the sooner commercial and service activities will recover, so the small business sector and individual business households will automatically recover. This indirectly helps save costs to support business activities for these two groups.

In addition, the “sidewalk” economic sector also benefits from this policy. This area has always existed, small but the economic benefits generated are significant. The General Statistics Office has announced that activities from this individual business sector contribute more than 10% of GDP. Direct support for this economic sector is relatively difficult to implement, but indirectly by stimulus is feasible and appropriate.

Thus, a policy solves the multi-objective problem, indirect benefits offset the cost factor.

– What about other disadvantages, how does this solution achieve many goals?

– In order to promote the dual impact, policy design needs to simultaneously apply support measures: extending the tax payment time for businesses; Exemption from late payment fines. These solutions have been implemented since 2020, and have worked, it is highly recommended to continue, supplementing the main solution.

In addition, in order to minimize the policy lag, communication needs to be coordinated in parallel, emphasizing two factors: the tax rate reduction and the short-term application period.

From the perspective of behavioral finance, the more information consumers have, the faster they can adapt, and soon adjust their personal consumption behavior before the tax rate returns to the old level. These two factors will combine to push consumer psychology to increase spending quickly, in order to optimize the benefits received from the tax reduction policy.

The resonance will push consumer psychology to increase spending quickly, in order to optimize the benefits received from the tax reduction policy, and that is the strongest possible motivation to create a breakthrough for the economy.

Source: vnexpress.net