Issue of April 2023 – Drafting resolution on value – added tax reduction

Dear Valued Clients,

With the goal of stimulating consumer demand, recovering and developing the economy after the Covid-19 pandemic, in 2022 the Government issued Decree No. 15/2022/ND-CP (“Decree 15”) dated January 28, 2022, providing tax exemption and reduction policies under Resolution No. 43/2022/QH15 of the National Assembly, with a strong focus on value-added tax (“VAT”) exemption and reduction. However, besides the results achieved, in the process of implementing Decree 15, both taxpayers and tax authorities have encountered many difficulties when identifying goods and services that are not subject to tax reduction. Therefore, recently, the Ministry of Finance has submitted to the Government a Draft Resolution of the National Assembly on reducing VAT (“Draft Resolution”).

In this Legal Update, we would like to summarize and clarify new policies that are beneficial to the investors if this Draft Resolution is officially approved.

1. Continue VAT reduction in 2023

According to the provisions of Article 1 of the Draft Resolution, the Ministry of Finance has proposed a VAT reduction for goods and services currently subject to 10% VAT. This is one of the highlights of this Draft Resolution.

Previously, the VAT reduction policy in 2022 according to Article 1.1 of Decree 15 was applied to goods and services currently subject to 10% VAT, except for the following goods and services:

• Telecommunication, financial activities, banking activities, securities, insurance, trading of real estate, metal, and precast metal products, mining products (excluding coal mining), coke mining, refined oil, and chemical products[1].
• Goods and services are subject to special consumption tax[2].
• Information technology as prescribed in the Law on information technology[3].
• Reduction of VAT for each type of goods and services mentioned above shall be applied consistently in all stages, including import, production, processing, and trading. Coal mines for sale (including coal mined and then washed, sieved, and classified under a closed process) shall be eligible for VAT reduction.  VAT on coal products in Appendix I enclosed with Decree 15 in stages other than the stage of mining and sale shall not be reduced.

Thus, it can be seen that the Draft Resolution no longer limits certain types of goods and services as in Decree 15 and instead the draft has applied consistently the VAT reduction with “goods and services currently subject to 10% VAT”. To put it simply, in case this Draft Resolution is approved, all goods currently subject to 10% VAT will have the VAT rate reduced without any exclusion.  The reason for this proposal is because of the fact that when applying the VAT reduction in 2022, many enterprises, and individuals have faced great difficulties when separating invoices to deduct 10%, 8% to respective goods and services according to the appendix issued with Decree 15.

2. VAT reduction rates in 2023

Also in Article 1.2 of the Draft Resolution, the new VAT rate of 8% will be applied for goods and services currently subject to the 10% VAT. The reduction of VAT for each type of goods and service currently subject to the 10% VAT shall be applied consistently in all stages, including import, production, processing, and trading.

Particularly, business establishments (including household businesses and individual businesses) that pay VAT using the direct method (as a percentage (%) of revenue) shall be eligible for a 20% reduction in the percentage (%) used as the basis for calculating VAT when issuing invoices for the goods and services currently subject to 10% VAT.

For goods and services currently subject to 5% VAT, it will remain unchanged. As a matter of practice, the formula for calculating the payable tax amount shall be the output VAT minus input VAT. For goods and services currently subject to 5% VAT, the output tax amount is already smaller than the input tax amount, so the output amount does not incur and it is deductible or in this case, VAT does not incur at all. Conversely, with 10% VAT, there will be a VAT payable because the output tax is larger than the input tax.

3. Expected time for VAT reduction in 2023

Although the Draft Resolution does not specify how long the proposed time for VAT reduction is to be applied, in the Report on the Draft Resolution of the National Assembly on the VAT reduction, the Ministry of Finance has proposed that the application period is from the time this policy is issued until the end of December 31, 2023.

Thus, it is expected that the VAT reduction will be applied through the end of 2023 and it will be started from the time of ratification of this Draft Resolution.

As usual, we hope you find this Legal Update helpful and look forward to working with you in the upcoming time.

Kind regards,

ENT Law LLC

The full version of this Legal Update can be found here.

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[1] Further details are provided in Appendix I enclosed with Decree 15.

[2] Further details are provided in Appendix II enclosed with Decree 15.

[3] Further details are provided in Appendix III enclosed with Decree 15.