Legal perspective of value-added tax rate deduction to support businesses in recovering from the cov

LEGAL PERSPECTIVE OF VALUE-ADDED TAX RATE DEDUCTION TO SUPPORT BUSINESSES IN RECOVERING FROM THE COVID-19 PANDEMIC AND THE PRACTICAL IMPLEMENTATION

 

Nguyễn Thị Thảo Nguyên[1]

 

Abstract:

 

The COVID-19 pandemic has significantly impacted Vietnam's economy, leading to an increasing number of small and medium-sized enterprises going bankrupt and dissolving during and after the pandemic. The government has implemented numerous fiscal and monetary policies to support the Economic-Social Recovery and Development Program. One prominent initiative is the reduction of the value-added tax (VAT) rate for most taxed items from 10% to 8%. According to the Government's report, the urgent development, issuance, and implementation of support measures for businesses and citizens have been considered timely, positively impactful, well-received by the business community, and have significantly contributed to the positive outcomes in the recovery and development of both businesses and the economy in recent times. However, the introduction of new and urgent policies within a short period has led to various limitations in terms of applicability, implementation inconsistencies, and confusion for enterprises. This article analyzes the content of the VAT reduction policy for some items from 10% to 8%, the legal implementation of this policy, and the lessons for the future.

 

Keywords: VAT reduction, Covid-19, business support

 

1. Statement of the problem

 

Value Added Tax (VAT) in Vietnam has undergone a developmental process since its experimental implementation in 1993 until the present day. Starting from the initial experimental application in 11 units, leading to the official enactment of the VAT Law No. 57/1997/L-CTN and subsequent amendments by the VAT Law No. 13/2008/QH in 2008, the VAT policies have gradually evolved and adjusted to reflect the development of Vietnam's market economy.

 

The current VAT Law applies three different tax rates: 0%, 5%, and 10%, applicable to various groups of goods and services. The reduction of the tax rate from 10% to 8% in 2022 through Government Decree No. 15/2022/NĐ-CP is considered a timely and effective measure to support the economic recovery after the COVID-19 pandemic. However, the implementation of the policy to reduce the VAT tax rate still faces some challenges and areas that need improvement. It is necessary to examine the incomplete aspects of the implementation process of the tax reduction policy to ensure transparency, efficiency, and fairness in the current tax policy application.

 

2. The legal regulations on the value-added tax reduction from 10% to 8% policy for some items

 

Firstly, the concept of value-added tax

 

Value-Added Tax (VAT) is closely related to the concept of added value in the process of production and business. Added value is typically defined as the increase in the value of a product or service after each stage from research, production, distribution to consumption. It is the difference between the value added in the transformation from raw materials to finished products, created by the business production activities.

 

VAT is essentially a tax applied to this added value of goods, services, and products at each stage in the production and business chain. The VAT mechanism helps manage prices, control consumption, and create fairness in the tax system. By applying tax based on the value increment at each stage, VAT supports the effective management of resources and finances for the country in today's diverse and complex business environment.

 

Secondly, the value-added tax reduction policy to support businesses in recovering after the Covid pandemic.

 

On January 28, 2022, the government issued Decree No. 15/2022/NĐ-CP outlining the policies for exemption and reduction of taxes in accordance with Resolution No. 43/2022/QH15 of the National Assembly on financial and monetary policies to support the economic and social recovery and development program. This includes provisions related to VAT, reducing the tax rate by 2% from February 1, 2022, to December 31, 2022, for certain groups of goods and services that currently have a VAT rate of 10% (reduced to 8%), excluding some specific goods and services. In Decree No. 15/2022/NĐ-CP, the government does not apply the value-added tax reduction policy universally to all types of goods and services. Instead, it provides a list of exemptions, with certain goods and services not eligible for the reduced rate of 8% and maintaining the original tax rate of 10%. The details of these exemptions are specified in three appendices accompanying this Decree.

 

The target of the VAT reduction includes goods and services that are not listed in the categories of goods and services such as: (1) 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, chemical products; (2) Goods and services subject to excise tax; (3)  Information technology as prescribed in the Law on information technology.

 

First, there are the groups of goods and services that receive a reduction in VAT. The VAT reduction applies to groups of goods and services currently subjected to a tax rate of 10%, excluding the following groups of 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, chemical products. Further details are provided in Appendix I enclosed Decree No. 15/2022/NĐ-CP.

 

b) Goods and services subject to excise tax. Further details are provided in Appendix II enclosed Decree No. 15/2022/NĐ-CP.

 

c) Information technology as prescribed in the Law on information technology.  Further details are provided in Appendix III enclosed Decree No. 15/2022/NĐ-CP.

 

- Reduction of VAT for each type of goods and services above shall be applied consistently in all stages, including import, production, processing and trading.   Coal mined 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 Decree No. 15/2022/NĐ-CP in stages other than the stage of mining and sale shall not be reduced.

 

In case goods and services in Appendixes I, II and III enclosed this Decree are not subject to VAT or are subject to 5% VAT in accordance with the Law on value-added tax, regulations of the Law on value-added tax shall prevail and VAT on such goods and services shall not be reduced.

 

Second, the reduction rate of VAT. Decree No. 15/2022/NĐ-CP specifies the reduction rate of value-added tax as follows:

 

- Business establishments that pay VAT using the credit-invoice method shall pay 8% VAT on the goods and services specified above.

 

b) Business establishments (including household businesses and individual businesses) that pay VAT using the direct method (as a percentage (%) of revenue) shall be eligible for 20% reduction in the percentage (%) used as the basis for calculating VAT when issuing invoices for the goods and services eligible for VAT reduction specified above.

 

Decree No. 15/2022/NĐ-CP stipulates that businesses must issue separate invoices for goods and services eligible for value-added tax reduction. In cases where a business fails to issue separate invoices for the goods and services qualifying for the value-added tax reduction, the tax reduction will not be applicable.

 

In the case where a business has already issued invoices and declared value-added tax based on the tax rate or percentage, but the reduction has not been applied as specified in Decree No. 15/2022/NĐ-CP, the seller and buyer must create a written record or agreement clearly stating the error. Additionally, the seller must issue an adjusted invoice and provide it to the buyer. Based on the adjusted invoice, the seller declares the adjusted output tax, and the buyer declares the adjusted input tax (if applicable).

 

In case a seller or provider of goods or services that are eligible for VAT reduction has issued invoices in the form of tickets with the printed prices, and wishes to keep using these invoices, they shall stamp the reduced prices (by 2% of the tax rate or by 20% of the percentage (%) of revenue) beside the pre-printed prices. [2].

 

After the implementation process, it was observed that there were several issues not specifically addressed and challenges encountered. Therefore, on June 20, 2022, the government issued Decree No. 41/2022/NĐ-CP, amending and supplementing certain provisions of Decree No. 123/2020 on invoices and documents, and Decree No. 15/2022 on tax exemption and reduction policies in accordance with Resolution No. 43/2022/QH15 issued by the government to enhance and refine the aforementioned contents.

 

3. The practical application of the legal regulations related to the value-added tax reduction policy from 10% to 8% for certain goods and services.

 

The results of implementing the VAT reduction policy have shown that the total support package for VAT reduction in 2022 reached about 44 trillion VND, and the VAT reduction has stimulated consumer demand, contributing to promoting business development. However, alongside the achieved results, after 4 months of implementing this new regulation, both taxpayers and tax authorities encountered various difficulties. Specifically:

 

Firstly, at the initial implementation of the new policy, there were many reflections from the Tax Departments of provinces, media agencies, and some related businesses regarding challenges in  Clause 4,  Article 1 of Decree No. 15/2022/NĐ-CP, which requires "issuing separate invoices for goods and services eligible for VAT reduction."

 

The necessity of creating separate invoices in this manner to apply the 8% tax rate is reflected in increasing the costs for the business, extending the time accountants spend on individually preparing invoices, and raising the expenses associated with using more invoices than usual. Instead of generating one invoice for products subject to various tax rates (5%, 8%, 10%), the business has to create two separate invoices – one invoice recording the 8% VAT rate and another invoice for the remaining tax rates. To address these challenges in issuing invoices for goods and services eligible for VAT reduction, ensuring compliance with the invoice contents, the government issued Decree No. 41/2022/NĐ-CP, effective from June 20, 2022, amending, Clause  4, Article 1 of Decree No. 15/2022/NĐ-CP as follows:

 

For businesses calculating VAT using the deduction method, when selling goods or providing services with different tax rates, the value-added tax invoice must clearly state the tax rate for each item, as regulations.

 

For businesses calculating VAT based on a percentage of revenue, when selling goods or providing services, the sales invoice must clearly state the reduced amount as required.

 

In addition, Decree No. 41/2022/NĐ-CP also issued a Notice regarding the reception and handling results of electronically issued invoices with errors using Form 01/TB-HĐSS, replacing Form 01/TB-SSĐT in Appendix IB issued with Decree No. 123/2020/NĐ-CP.

 

For cases from February 1, 2022, to June 20, 2022, businesses that followed the regulations in Article 2 of Decree No. 41/2022/NĐ-CP are still eligible for the VAT reduction and are not required to adjust their invoices. They will not face administrative penalties related to tax and invoices.

 

Secondly, difficulties related to identifying goods and services not eligible for tax reduction. The list of exempted items in the goods category is not clearly defined, and the appendix of excluded items is lengthy, making it challenging for businesses to determine which items qualify for tax reduction and which do not. Particularly for businesses with hundreds of items, referencing Appendix I of Decree 15/2022/NĐ-CP can be difficult, leading to potential complications in issuing invoices that directly impact the business operations. For instance, supermarkets with thousands of products face the challenge of assessing which items are subject to which tax rates, calculating price changes on labeled products, and implementing changes across a variety of products in a short period, posing a significant challenge for businesses dealing in numerous items in general and supermarkets in particular. Additionally, even after thorough document review, some businesses may still be uncertain about the applicable tax rate for their items. There are cases where two businesses negotiate a sale, agree on quantity, quality, and price with the customer, but cannot reach a consensus on whether the tax rate is 8% or 10%, resulting in the inability to finalize a contract.

 

Thirdly, during the implementation of Decree 15/2022/NĐ-CP, the process of reviewing, cross-referencing, and verifying goods and services against the specified categories poses a major challenge for business accountants. For example, a company engaged in photocopy services where printing ink is subject to a 10% VAT rate, and paper is subject to an 8% VAT rate, faces difficulties in determining the applicable tax rate for the products it sells. Similarly, in the case of selling alcoholic beverages, the tax rate remains at 10%, but if the beer is served to customers on a dining table, it falls under the 8% VAT rate for catering services. In the initial months of implementing the new regulations, due to the lack of unified guidance documents, each tax office provided individual guidance. For example, regarding invoicing beer for restaurants in Ho Chi Minh City, the Tan Binh Tax Office stated that if beer and food are invoiced together, the tax rate is 10%, while Tax Office District 7 advised separating the two invoices. Meanwhile, Tax Office District 3 argued that combining them results in an 8% tax rate because it is considered a service on the beer rather than a sale like other distributors. The conflicting viewpoints of these tax offices have created confusion and difficulties for businesses.

 

Fourthly, the issuance of Decree 15/2022/NĐ-CP on January 28, 2022, which corresponds to the 26th day of the lunar calendar, closely coincided with the Tet holiday (Lunar New Year) of the Year of the Tiger. As a result, the content of this decree has not been fully received by the public and businesses. The decree was issued during the lunar New Year holiday, and people and businesses did not have sufficient time to understand it. Shortly after, on February 1, 2022, it became effective. During that period, people and businesses were still celebrating Tet, and the short time between the issuance and implementation fell within the lunar New Year holiday. This made it more challenging to update policies and conduct research. Especially with the invoicing activity, it is a daily operation closely associated with the business and production progress of enterprises. Without having the time for learning and training, businesses must apply it to issue invoices immediately, while the tax rate regulations extend over dozens of pages.

 

Although there are still many shortcomings in the practical application of the new regulations on value-added tax (VAT) reduction, during the implementation process, tax offices and relevant authorities have timely supported the public and businesses. Through explanatory documents, decrees, and guiding circulars issued promptly after encountering issues, to some extent, they have helped the people and businesses effectively implement the provisions of this new policy.

 

4. Lesson Learned from Practice

 

In the years 2020-2021, due to the impact of the COVID-19 pandemic, the consecutive economic growth decreased significantly. The total domestic consumer demand was reflected by the overall retail sales index and revenue from goods and services for overall societal consumption. Before the pandemic, annual growth in total national consumer demand was below 10%, reaching highs of 12-13% in some years. However, from 2021, this index dropped to nearly 10%. Business operations faced numerous difficulties, with increased input costs, disrupted supply chains, and emerging issues concerning employment, livelihoods, social security, and public order. Alongside challenges in implementing new policies, the policy of reducing VAT from 10% to 8% for some goods played a substantial role. The application of this policy contributed to helping businesses, organizations, and individuals overcome the difficulties caused by the impact of Covid-19 to revive and develop their business activities. Simultaneously, it stimulated consumption and investment, thereby contributing to the recovery of the country's economy after the pandemic and supporting social security. Thus, we cannot deny the significant achievements attained by the application of this new policy. However, from these legal realities, we need to draw lessons for the future to swiftly apply new legal regulations in similar exceptional circumstances such as the Covid-19 pandemic, facilitating citizens and businesses during implementation.

 

Firstly, conduct specific studies to improve the VAT policy, aligning it with the development and trends of new industries in the global and Vietnamese economies. Expanding the taxpayer base and adjusting regulations on tax application can generate robust revenue for the country, enhancing financial resources for the government. Ensuring fairness, neutrality, and effectiveness in establishing VAT regulations aim to create a tax system that is easy to understand, implement, and manage, facilitating both taxpayers and tax authorities in complying with legal provisions conveniently. Specific regulations on tax rates for each group of goods or services are pivotal. Tax rates can be adjusted depending on industries, types of businesses, or customer groups. Tax rates must be set fairly and competitively while ensuring state budget revenues. In an increasingly globalized world, new tax policies need to align with international regulations, especially international trade agreements. This compatibility fosters a conducive business environment, enabling enterprises and consumers to better understand regulations and avoid confusion in transactions due to inconsistency between domestic and international rules.

 

Secondly, integrate information technology in implementing new policies to facilitate taxpayers in researching and applying new regulations. Equipping a comprehensive and updated information system and utilizing modern scientific technological software is indispensable in implementing tax policies, contributing to socio-economic development in each phase. To ensure a complete and reliable database, the tax sector needs to invest more in building a unified database for the entire sector. Presently, software for checking information about whether goods are eligible for tax reduction has become prevalent and highly supportive for businesses in researching their taxable goods. However, early implementation of these software tools before the effective date of the tax reduction policy will create a more favorable environment for enterprises. Early deployment allows these tools to be utilized right when the policy becomes effective, offering timely and convenient support for businesses in researching and applying tax regulations. Therefore, early implementation of these information technology applications will optimize the potential of the new policy when it takes effect, providing favorable conditions for efficient and timely enforcement while supporting businesses effectively.

 

Thirdly, training specialized personnel in tax management plays a crucial role in providing accurate and timely information to taxpayers. Well-trained personnel will possess extensive knowledge of the tax system and related procedures, assisting them in accurately and timely resolving taxpayer queries. Understanding tax regulations, tax-related issues, as well as accessing and comprehending new changes in tax policies, is crucial. Specialized personnel can offer clear and detailed information, explain complex matters in an understandable way, thereby helping taxpayers better understand their tax obligations and how to apply new tax policies, reducing misunderstandings, and enhancing transparency in tax compliance.

 

Fourthly, maintaining mechanisms to receive feedback from the business community and citizens is crucial. Listening to and adapting to feedback from taxpayers, who are directly affected by policies, will aid in timely adjustments if necessary. This flexibility optimizes the effectiveness of new regulations, adjusting them to suit practical implementation. Tax authorities demonstrating readiness to listen and provide guidance and adjustments based on business feedback help build a better cooperation environment between tax authorities and the business community. This enables businesses to understand tax regulations and their implementation better, optimizing compliance and reducing misunderstandings or errors, ultimately benefiting citizens and the business community and creating a favorable environment for businesses to operate transparently and fairly.

 

Fifthly, choosing the timing of new regulation implementation is crucial. Avoiding issuing regulations during specific periods like Lunar New Year is advisable, as this is a time when people and businesses are busy with increased production to meet holiday demands, and some businesses are on holiday, making updating, researching, and disseminating new policies to company staff extremely challenging. Additionally, there should be specific provisions on the time gap between issuing and applying new legal regulations. For policies directly impacting daily business activities, immediate implementation, such as the VAT reduction policy, requires an extended gap between issuance and enforcement. During the period between issuance and effectiveness, functional agencies, with tax authorities playing a pivotal role, need to organize seminars and training sessions for businesses on new policies for unified and effective application.

 

 5. conclusion

 

The policy of reducing VAT from 10% to 8% was applied to support economic recovery after the Covid-19 pandemic, yielding many positive effects in aiding businesses and citizens. The implemented support measures have produced positive outcomes and received high evaluations from the business community. The flexibility and timeliness of the tax policy played a vital role in stimulating the economy. However, the swift implementation of this new policy also came with challenges and hurdles in the implementation process. To improve, focus needs to be on resolving legal obstacles, strengthening information dissemination, and simplifying the tax policy implementation process. This will help businesses better understand and implement tax policies more effectively and transparently. Furthermore, changing and perfecting legal regulations should be done in a balanced manner, providing favorable conditions for businesses.

 

LIST OF REFERENCES

 

1. Nguyen Thi Huong (2022), Impact of reducing value-added tax rates on the Vietnamese economy, https://tapchicongthuong.vn/bai-viet/tac-dong-cua-viec-giam-thue-suat-thue-gia-tri-gia-tang-den-nen-kinh-te-viet-nam-88951.htm, accessed October 30 /2023
2. Finance Magazine (2022), Impact of policies to support businesses and business households during and after the COVID-19 pandemic, https://tapchitaichinh.vn/tac-dong-cua-chinh-sach-thue-ho-tro-doanh-nghiep-ho-kinh-doanh-trong-va-sau-dai-dich-covid-19.html, accessed October 30 /2023.

 

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