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| Officers of the Market Surveillance Department of Kien Giang province inspect cigarettes__Photo: Van Si/VNA |
The Ministry of Finance (MOF) has recently unveiled draft amendments to the Law on Excise Tax with several notable new points, including a proposal to hike tax on tobacco products.
Accordingly, the ministry puts forth two options on an absolute tax which would be additionally imposed on tobacco products from 2026, along with excise tax currently collected at the rate of 75 percent of the manufacturer’s selling price.
Under the first option, from 2026, an absolute tax would be additionally levied at the rate of VND 2,000/pack. Such absolute tax rate would annually increase by VND 2,000/pack during the 2027-30 period and reach VND 10,000/pack by 2030. For cigars, pipe fine-cut tobacco, rustic tobacco, tobacco products in other forms, and other preparations from tobacco for smoking, snorting, chewing, smelling or sucking, the absolute tax of VND 20,000 per stick/100g/100ml would apply from 2026 and annually rise by VND 20,000 per stick/100g/100ml until reaching VND 100,000 per stick/100g/100ml by 2030.
As per the second option, the absolute tax rate of VND 5,000/pack would be applied right from 2026, then annually rise by VND 1,000/pack and reach VND 10,000/pack by 2030. Similarly, the absolute tax applicable to cigars, pipe fine-cut tobacco, rustic tobacco, tobacco products in other forms, and other preparations from tobacco for smoking, snorting, chewing, smelling or sucking would be set at VND 50,000 per stick/100g/100ml, then yearly up by VND 10,000 per stick/100g/100ml until reaching VND 100,000 per stick/100g/100ml by 2030.
For the time being, the MOF seems to prefer the second option but many experts, though having no doubt about the necessity to raise tax on tobacco products, still worry about possible consequences of such a “shocking” tax rise.
As explained by the MOF, a drastic tax increase will make tobacco products become more expensive and therefore lead to an immediate decline in tobacco use. However, if looking from a more comprehensive perspective, a sharp tax rise will push up legal cigarette retail price and consequently drive consumers to purchase smuggled tobacco products which are not affected by taxes and hence are much cheaper. In fact, legal cigarette consumption might decrease but total cigarette consumption will likely remain the same or even grow because consumers will switch to buying cigarettes from illegal sources. Besides, the application of a “shocking” absolute tax rate right from the first year will lead to a sudden climb in the price of not only luxury-brand cigarettes but also low-priced products. This means that smuggled cigarettes will appear in all segments of the domestic tobacco market rather than focusing only on the luxury segment as before, thus making the fight against cigarette smuggling even more complicated and challenging.
Recommendations from authorities
Given the fact that low-priced cigarettes account for a share of 75 percent of the lawful tobacco market, what will happen if Vietnam sharply increases tax on cigarettes? This question was raised by Chairwoman of PwC Vietnam Dinh Thi Quynh Van at a conference discussing excise tax on tobacco products recently held by the Vietnam Tax Consultants’ Association (VTCA).
“The threat of tobacco smuggling will surge following a tax hike on tobacco. This issue is not unique to Vietnam. Hence, the MOF should take careful considerations so as to adopt an appropriate tax increase roadmap that would be gradually acceptable by the market,” Van recommended.
In addition to smuggling, loss of state budget revenue which will likely result from negative impacts of tax hike on tobacco enterprises constitutes another matter of concern.
The MOF, on the one hand, estimates that revenue from excise tax on tobacco products may increase from VND 17.6 trillion in 2022 to VND 39.2 trillion in 2030, thanks to the application of the mixed tax regime but, on the other hand, admits that this revenue target can hardly be achieved if tobacco smuggling still exists.
Addressing the above-said conference, Nguyen Chi Nhan, Secretary General of the Vietnam Tobacco Association (VTA), said the MOF’s proposal was completely an unexpected piece of news to tobacco enterprises. “This will negatively affect the tobacco industry,” he stressed.
The VTA, in its turn, proposed two options for application of an absolute tax on tobacco products, both starting at the rate of VND 1,000 VND/pack in 2026 and reaching VND 3,000/pack by 2030. As explained by the VTA, if such tax rate is applied, the ex-factory price (selling price exclusive of value-added tax) and retail price of tobacco products will rise by 4-20 percent, a rate which is regarded by the association as “suitable to the characteristics of legal tobacco products” and can help avoid a shocking increase in the price of legal cigarettes, thus contributing to stabilizing the market and preventing smuggled cigarettes.
Meanwhile, VTCA President Nguyen Thi Cuc suggested the MOF should carefully study the plan and roadmap for increasing excise tax on cigarettes so as to ensure the harmony in community wellbeing, stability of production and business of enterprises, and state budget collection.
Due to its strong and direct impacts on stakeholders, tax policy is closely related to socio-economic changes. In addition to the loss of state budget revenues, if consumers switch to using illegal cigarettes, which are often of dubious quality, numerous health consequences may occur, putting down a heavier burden of medical costs on the State in the long run and making it difficult to attain the goals of directing consumers to high-quality tobacco products and minimizing tobacco harms.
According to statistics from the World Health Organization (WHO), Vietnam is among the 15 countries with the largest number of adult male smokers in the world, with about 15.3 million smokers and 33 million people affected by second-hand smoke. About 40 thousand people in Vietnam die each year from smoking-related diseases. Although many measures and action programs have been implemented, including two increases in excise tax on tobacco products in 2016 and 2019, the obtained results are still below expectations. The smoking rate among male adults has decreased but just at a modest rate, from 47.4 percent in 2010 to 45.3 percent in 2015 and 42.7 percent in 2022.
As evaluated by WHO, one of the main reasons behind the high smoking rate in Vietnam is tobacco price which is quite low and currently ranked 157th out of 161 countries. Vietnam is now applying excise tax on cigarette products at the rate of 75 percent of the manufacturer’s selling price. However, the total share of consumption taxes in the retail price of cigarettes in Vietnam accounts for merely 38-39 percent, much lower than the average rate in middle-income countries (59 percent) and most ASEAN countries (60-70 percent), as well as the proportion recommended by WHO - two-thirds to three-quarters of the retail price.- (VLLF)
