1. What is value-added tax
Article 2, Law on Value Added Tax 2008 prescribes that:
“Value-added tax is a tax imposed on the added value of goods or services arising in the process from production, circulation to consumption.”
Therefore, Value Added Tax (or VAT) is charged only on the increase in value at each stage of production and distribution, rather than on the total price of goods and services. This tax is embedded in the final selling price and while consumers ultimately bear the cost, it is the businesses and manufacturers who are responsible for collecting and remitting the tax to the government. In this way, VAT functions as an indirect tax where the legal tax burden falls on one party (businesses) but the economic burden is passed on to another (consumers).
2. How VAT Works
VAT is structured to prevent double taxation while ensuring that tax revenue is collected efficiently. Here’s how it functions:
- Input VAT – Businesses pay VAT on the raw materials, services, and goods they purchase.
- Output VAT – Businesses charge VAT when selling their products or services.
- Tax Deduction – The difference between Output VAT and Input VAT is remitted to the government.
For example, if a manufacturer buys materials for VND 10 million with a 10% VAT (VND 1 million), then sells the finished product for VND 20 million plus VAT (VND 2 million), the manufacturer only needs to pay VND 1 million (VND 2 million output VAT minus VND 1 million input VAT) to the tax authorities.
4. VAT continued being extended reduction
According to Decree 180/2024/ND-CP effective January 1, the VAT reduction is applicable to goods and services that were previously taxed at 10 percent. However, several sectors are excluded from this tax cut, including:
- Telecommunications and IT
- Financial services (banking, securities, insurance)
- Real estate
- Metal and prefabricated metal products
- Mining products (except coal)
- Coke and refined petroleum
- Chemical products
- Goods and services subject to special consumption tax
The Ministry of Finance, which drafted the decree, estimates that this tax reduction will lead to a budget shortfall of approximately VND 25 trillion. However, the measure is intended to reduce household expenses, increase savings capacity, and ultimately boost consumer spending and overall consumption in the economy.
5. The duration of the VAT reduction
According to Decree 180/2024/ND-CP, this reduction will be applied for six months, starting from January 1 this year. After this period, the new Law on Value-Added Tax No. 48/2024/QH15 will officially take effect.
VAT is a crucial component of Vietnam’s tax system, and its reduction in 2024 provides significant relief for both consumers and businesses. While the policy is temporary, its economic impact could be long-lasting, helping stimulate growth in multiple industries.
Businesses should stay informed about upcoming VAT reforms to ensure compliance and optimize their financial strategies.
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