TAXATION POLICY AND TAX REFORMS IN VIETNAM - Assignment Example

?TAXATION POLICY AND TAX REFORMS IN VIETNAM INTRODUCTION The taxation policy of an economy has a major impact on its economic condition. Understanding the taxation policy of a country helps in assessing the role of income taxes on the economic growth. Countries constantly engage in debate to strike the right balance of taxes for the planned economies progress (Miller, & Oats, 2009). Economic analysts suggest that economic policies are very important for the growth of an economy. Taxes are important sources of finance for the governments. Governments implement combination of direct and indirect based to generate effective results and higher revenues for meeting capital and public revenue expenditure (Jones, Rhoades-Catanach, & Lemler, 2010). The governments which have more opportunities for generating finance from revenues of public enterprises besides tax implementation attempt to design the lenient taxation policies which attain effective results. Vietnam was a developing economy and it had shown dramatic development over the years. This dramatic growth of the country with the passage of time is centrally attributed to its economic policies. One major component of these is the taxation reforms. Hence, in this report a discussion is presented to signify that the change and development in the taxation policy that reformed the economic situation of Vietnam. A description of the taxation policy and the objectives which are intended to be achieved are also discussed in this report along with methods used for development taxation policy in reference to the theory is developed. The report will be wrapped up by making recommendations on the basis of the economic theory on which it is developed. ECONOMIC OBJECTIVES AND TAXATION STRUCTURE OF VIETNAM After the war in 1954-1975, Vietnam adopted a market oriented strategy for development. The process of the reforms was initiated during the mid 1980’s. Before these reforms were proposed, the state was playing a very important role in the economic development of the country. The government’s revenue collection from the enterprises was linked to profit sharing with the organizations. For achieving the objectives of efficiency in government organization, it was mandated for the managers to abide the directives and the policies proposed by the state. This was aimed at improving the performance of the economic performance of the government and private enterprise in local and international market (Yui, n.d.). New legislations were enacted and the promulgations of the company law were also implemented. The changes were made to the foreign Investment Law, Private Enterprise Law and the Company law. During this time the first phase of the reform was implemented. At this time the government was in dire need of implementing the policies and overcoming the economic challenges such as controlling the effect of hyper inflation. Implementations of the policies were forced with reforms in the import and export taxes, special consumption taxes and profit taxes etc. The enterprises that were non state owned were levied with registration tax, excise tax and agricultural taxes. This in result had direct impact on the FDI and increased the overall productivity of the economy. These reforms were considered for contribution in the economic improvements and these practices made the tax system more transparent. The overall series of measures of growth contributed to the economic development significantly and growth of the Vietnam economy over the years. Through these reforms the overall growth in the revenue of the economy increased by more than five times. The report here after focuses on the reform in the taxation policies of the Vietnam (Yui, n.d.). REFORMS IN THE TAXATION POLICY OF VIETNAM The taxation system plays a very important and critical role in structuring the macroeconomic conditions of the economy. . The initial measures mentioned above had significant impact on the economy of Vietnam. It contributed towards the success of Vietnam with its social and economic development. This ultimately contributes in improving the production. This strengthens the exports, increases the overall investments and brings improvement in the economic constituents which ultimately improved the performance of the all economy. This also improved the overall state budget which improves the spending of the state on public expenditure (Yui, n.d.). Turnover tax in the initial phase had much discretion on the basis of the industry. This measure, despite contributing to the economic progress, feared the hazards to the future economic development. Hence, the series of the reforms then followed which are discussed below: TAXATION REFORMS AND OBJECTIVES The tax reforms which were implemented on the economy of Vietnam are based on three phases. The initial phase of the tax reform took place from 1990-1995. The second phase of the tax reform spread from 1997-2005. The third and the final phase of the tax reform initiated from 2006 to 2010. The three phases of the tax reforms were intended to achieve the single objective of economic growth of Vietnam economy in the long run. This objective of the long run economic development was aimed as the result of making tax crucial tool for the government for managing macro economic indicator, steeping production of goods and services in the economy and facilitating government with revenue to conduct public expenditure (Quang, & Dung, 1997). INITIAL PHASE OF THE TAX REFORM (1990 TO 1995) Objective: To increase revenue available with government, attract local and international investment with transparent tax system (Yui, n.d.). Reform: The initial tax reform was executed in the early 1990s. The consolidated tax system was introduced which included nine critical taxes. These measures were directed for the replacement of various other kinds of taxes that were implemented on sectors such as privately owned industries, state owned zone, and trade zone etc. These measures also included the agricultural segment that accounted nearly three quarter of country’s population.. In the initial phase of tax reform the major contribution to government exchequer was made by the profit tax, turnover tax and import/export tax.. SECOND PHASE OF THE TAX REFORM (1997 TO 2005) Objective: To integrate consistency in the economic tax system and step towards market orientation of the Vietnam’s economy. Reform: The second stage of the tax reform was began in the late 1990s to align the taxation structure in Vietnam to the international trade agreements. During this period Vietnam joined the ASEAN Free Trade Agreement (AFTA). During this phase, Vietnam was also in negotiation to enter the agreement with World Trade Organization (WTO). The new taxes implemented for the purpose included corporate income tax (CIT) and value added tax (VAT) (Phung, n.d). Along with benefits of the reforms there were two problems which arose in the applying the value added tax (VAT) in Vietnam. These problems included the affect on the ability of management and the other issue was related to the calculation of the tax rate on the small accounts of entrepreneurs. The poly-scheduled income tax system in Vietnam contrasted to the requirement of the simple tax structure for VAT calculation. Hence, measures lacked the cautious preparation that was required for the execution of value added tax. The two other tax laws implemented in this phase included individual income tax and corporate income tax. The profit tax was replaced by corporate income tax at the 33 percent and implemented smoothly on foreign and domestic investors.. The corporate income tax (CIT) was charged just on big private businesses and companies while the individual income tax was designed and charged from the small private businesses (Quang, & Dung, 1997). THIRD PHASE OF THE TAX REFORM (2006-2010) Objective: The third tax reform was very important for the macroeconomic management. It was further aimed to encourage the overall domestic growth, investment and trade activities. With the implementation of these reforms, the government seeks to increase the overall revenue and alignment with international economic integration. Reforms: The VAT, SCT and the CIT were also reformed and amended. Tax exemptions on goods and services are reduced. Also banking channel to be used for making payments was implemented so that VAT is duly calculated. Two amendments in special consumption tax with inclusion of certain items. Corporate income tax was reduced from 28% to 25% (Phung, n.d.). From reforming the tax administration the impact will be prominently observed on the organization, personnel and technology. Similarly, the other tax reforms include the Personal Income Tax, Natural resource tax, Non-agriculture and land use tax and environmental protection tax (Phung, n.d.). The result of the tax reform shows that Vietnam has been significantly successful in implementing the changes. Tax reforms encounter a lot of obstacles and the implementation relies solely on the policy makers. ECONOMIC THEORY FOR TAX REFORMS IN THE VIETNAM Research of the Liu, Nguyen, & Tran, (2012) states that economic theory and certain level of tax burden on the economic activity plays significantly positive role in the economic growth. It also refers to converse impact of excessive taxes on economic growth. The controlled or a limited tax rate refers that small percentage of tax rate results in the economic growth by stimulating national income. This national income growth is the result of the collected national savings when employed in the business for expansions which in turn generate revenues. This initially reduces the state budget but since the economy is less intervened by the government; hence, the growth of private or market based economy brings in the revenue in sustained stream in long run (Liu, Nguyen, & Tran, 2012). Tax burden, hence, increases the government in initial phases but consistent rise in tax burden results in reduction in aggregate demand as less money is available to public for spending. Finally, governments are required to strike the balance at maximum point at which tax rate must be determined. APPLICATION OF THEORY IN THE CONTEXT OF THE IMPACT OF TAXES ON ECONOMY OF VIETNAM AND ITS IMPACT ON THE ECONOMY OF VIETNAM In the economic growth it has been observed that taxation policies have a significant impact on the economic behavior. It is a noted fact that people respond to incentives and with the increased tax rate the overall incentives which they receive reduces. Economic researchers have acknowledged the fact that lower taxes improve the overall incentives offered to the people and hence it improves the overall productivity. With improved taxes the productivity of the labor increases. Contrary to this the economics also refers that tax rate stimulates the economic activity (Palacios, & Harischandra, 2008). Vietnam being an Asian country possessing an overall population of more than 70 Million people has always been considered in the history as a poor country (Liu, Nguyen, & Tran, 2012). The tax reforms in Vietnam in the first two phases can be best explained by the Laffer Model as depicted below: (Liu, Nguyen, & Tran, 2012) Government over three reforms increased the tax revenues with various reforms. This increase in the taxes increased the over budgetary funding available with the government. The effectiveness of this model and policy can be viewed from the increase in the budgetary revenue and investment in the economy for the period of first reforms as follows: (Quang, & Dung, 1997) Since measures were aligned to integrate the market orientation in the economy of Vietnam, the overall business in Vietnam increased. The second reforms further continued with similar model as the further alignment was centered as objective of reforms. The revenues of the government with second reforms further increased such as from 1996-2000 the tax revenue increased in multiple of 2.3 times as compared to the revenue collected in first reforms (Phung, n.d.). Furthermore, the tax reforms in second phase also increased revenues by twice in 2000-2005 as compared to amount collected in 1999-2000 (Phung, n.d.). Over these periods, the economy has developed excessively because of availability of natural resources and effective implementation methods proposed by the governments. The impact of overall economic reforms and consistent changes in the policies which contributed to the economic growth of the state was attractive. The tax rate that is implemented has a direct impact on the behavioral responses of the taxpayers. The third phase refers that Vietnam government has increased the taxes to maximum; therefore, in the third phase government conducted amendment in the taxes and also reduced the Corporate Income Tax to 25 percent from 28 percent. Hence, in line with the Laffer model above, government managed to achieve the maximum point of taxation. The tax responses are important for three main and distinct reasons which include increase the revenue, efficiency and the macroeconomic growth. The sole purpose of tax reforms is improving the economic condition. Hence, the reform of taxation ultimately took the Vietnam from the status of developing economy to developed economy. SUGGESTIONS The study of Liu, Nguyen, & Tran, (2012) assessed the effectiveness of the taxation in Vietnam as compared to China, The in depth assessment of the taxation of Vietnam in the study 16 developed recommendations which are as follows: The Vietnam has reached the maximum capacity of the tax burden of the people,; therefore, the reduction in tax rates are expected to increase the economic performance. Lowered tax rate will increase savings which will increase the capital expenditure due to increased demand from the market. With the tax generated from the reforms, the government has made excessive investment in the state owned enterprises. These companies are contributing less as compared to the companies of similar size working in private sectors. Hence, despite increased tax burden to finance the capital to those companies, Government of Vietnam shall reduce of burden of taxes by resizing these companies. Consistent rise in tax has affected the economy’s ability to drive the market demand. There has been consistent rise in the inflation rate that has affected the purchasing power of people. Hence, this also requires Vietnam to reconsider the taxes as tax contribution by economy is much higher than the capacity of the economy. Hence, in line with the Laffer model, the Vietnam government has reached the maximum level of tax that can generate revenue for the government, Therefore, to maintain the economic growth it must reconsider the taxation reforms to reduce the burden on public. CONCLUSION Taxation policies adapted by a nation have a strong impact on the overall economic growth. Government uses the taxation policies to not only encourage new businesses and to encourage the existing businesses to expand but these policies are also used by the government to attract foreign direct investment (Piggott, & Whalley, 2009). It is important for the government of Vietnam to formulate specific objectives from the taxation policies and what the government would like to achieve. This would allow the government to answer some of the important questions such as what needs to be done and how it needs to be done. Tax reforms have also been used as a tool to encourage businesses by the government and it can be used in future as well in order to encourage businesses and improve the economic condition of the country. This report has also presented some of the suggestions that the policy makers, economists and government of Vietnam can use as it would help in stimulating economic growth in the country. References Jones, S. M., Rhoades-Catanach, S. C., & Lemler, B. (2010). Principles of taxation for business and investment planning. Issues in Accounting Education, vol. 25, no. 3, pp. 599-600. Liu, H., Nguyen, H. C., & Tran, T. H. (2012). Tax Burden and Economic Growth: Theory and Practice in Vietnam. Available from http://www.ipedr.com/vol46/015-ICBER2012-N10010.pdf [Accessed 16 October, 2013] Miller, A., & Oats, L. (2009). Principles of international taxation. London: Tottel Publishing. Palacios, M., & Harischandra, K. (2008). The impact of taxes on economic behavior. Available from http://pirate.shu.edu/~rotthoku/Prague/ImpactofTaxesonEconomicbehavior.pdf [Accessed 16 October, 2013] Phung, N. (n.d.). Tax Reform in Vietnam: Main accomplishments and lessons. Tax Policy Department – MOF of Vietnam, Available from http://www.imf.org/external/np/seminars/eng/2011/revenue/pdf/nguyen.pdf [Accessed 16 October, 2013] Piggott, J., & Whalley, J. (2009). UK tax policy and applied general equilibrium analysis. Cambridge Books. Quang, N. D., & Dung, N. T. (1997). Tax reform in Vietnam. Vietnam's Socio-Economic Development, Available from http://www.arts.uwaterloo.ca/~vecon/download/ngodinhquang/ngodinhquang199706.pdf [Accessed 16 October, 2013] Yui, Y. (n.d.). FDI and Corporate Income Tax Reform In Vietnam. Available from http://www.econ.hit-u.ac.jp/~ap3/apppfdi6/paper/VIETNAM.pdf [Accessed 16 October, 2013] Read More