Raising the Luxury Tax on Tobacco: Impacts and Considerations

A seminar held by the Vietnam Tax Consulting Association (VTCA) and the Institute of Financial Strategy and Policy discussed the potential effects of a proposed increase in luxury tax on tobacco.

The Ministry of Finance (MOF) has introduced a draft law on special consumption tax with provisions designed to regulate consumption and reduce tobacco production in alignment with the national strategy to combat the harmful effects of tobacco by 2030.

The proposed mixed taxation scheme includes a 75 percent percentage tax and fixed-rate duties set annually from 2026 to 2030.

Two options have been suggested for flat-rate duties, with differing incremental increases per pack annually under each option until 2030.

Analysis by the Institute of Financial Strategy and Policy indicates that legal tobacco output would decline significantly by 2030 under both options, leading to a rise in smuggled tobacco consumption.

Despite a projected 7 percent decrease in total tobacco consumption by 2030 compared to 2025, there may be a 13 percent annual increase in state budget collections. However, tax evasion rates due to a shift to smuggled tobacco could rise by 33-34 percent annually.

Concerns have been raised about potential bankruptcies in the tobacco industry, with estimates of revenue decreasing by 32-35 percent due to higher taxes prompting consumers to turn to smuggled products.

Possible scenarios suggest a 70 percent decrease in legal tobacco output and a surge in smuggled tobacco consumption if luxury tax rates spike too quickly by 2030.

It is emphasized that tax adjustments need to be approached cautiously to avoid market disruptions and substantial losses in tax revenue due to increased smuggling.

Proposals have been made to amend the luxury tax by implementing reasonable flat-rate duties and creating a systematic tax increment plan leading up to 2030.

Some tobacco manufacturers have suggested a tax of VND1,000 per pack in 2026, with subsequent incremental increases every two years, aiming for a VND3,000 tax by 2030.