Discussion on Proposed Tobacco Tax Increase in Vietnam

At a workshop on luxury tax adjustments and anti-smuggling efforts held on November 19, Nguyen Thi Cuc, Chair of the Vietnam Tax Consultants’ Association, emphasized the importance of increasing the luxury tax, known as special consumption tax (SCT) in Vietnam. She advocated for a balanced approach to its implementation.

The Ministry of Finance is currently drafting new legislation concerning the SCT and has laid out two potential options for consideration.

Option 1: Maintain the current tax rate of 75 percent while introducing a flat-rate duty of VND2,000 per pack. This duty will be increased annually by VND2,000 until it reaches VND10,000 per pack by the year 2030.

Option 2: Starting in 2026, once the revised SCT Law is enacted, tobacco products will incur the 75 percent tax rate plus a flat-rate duty of VND5,000 per pack, which will rise by VND1,000 each year until it also hits VND10,000 by 2030.

Cuc highlighted that the objective of these tax increases is to lower smoking rates, particularly among young people, to safeguard community health and reduce the risk of serious illnesses such as lung cancer and respiratory issues.

However, she cautioned that raising the SCT could trigger an uptick in tobacco smuggling. This influx of smuggled goods, which evade taxes and lack quality control, could undermine the effectiveness of the legal measures intended to reduce consumption.

Imported smuggled tobacco avoids various taxes including VAT, SCT, and import tariffs, contrasting significantly with legally sold products. As a result, while legal consumption may plummet due to the luxury tax hike, illegal tobacco sales may climb in response.

Cuc referenced various studies that suggest potential outcomes should the SCT rise abruptly in Vietnam. Projections indicate a 7 percent reduction in overall tobacco consumption by 2030 in both scenarios. Furthermore, legal tobacco production is expected to fall sharply, with a potential decrease of 30 percent under Option 1 and 36 percent under Option 2 by 2030 compared to figures from 2025, prior to any tax increases. Such losses could severely harm the tobacco manufacturing sector, risking bankruptcy for companies facing a revenue drop of 32-35 percent.

In stark contrast, illegal tobacco consumption could surge, with estimates suggesting a 205 percent increase in smuggled tobacco under Option 1 and a 230 percent increase under Option 2 by 2030 relative to 2025.

Cuc posited that Option 1 is a more rational choice that could mitigate adverse effects on stakeholders. She recommended a well-considered timeline for tax hikes, suggesting that annual increases might overwhelm the legal tobacco industry and suggesting instead to allow adequate time for adjustment.

Additionally, Trang A Duong, member of the National Assembly’s Ethnic Council, argued that both proposals from the Ministry of Finance were excessively abrupt, potentially harming the tobacco industry. He urged consideration of various elements, including public health, social security, fiscal revenue, business stability, workforce welfare, and the management of illegal trade.

Duong noted a clear correlation between tax hikes and increased smuggling incidents. For instance, following the 2016 luxury tax increase from 65 percent to 70 percent, reported instances of smuggled tobacco increased from 6.8 million packs to 7.5 million packs the following year. Similarly, when the tax escalated from 70 percent to 75 percent in 2019, destruction of smuggled tobacco rose from 1.4 million packs in 2019 to 5.1 million in 2020 and up to 6.6 million in 2021.

Duong advised against annual tax increases, suggesting a more measured approach of adjustments every 2 to 3 years to better prepare market regulators to combat smuggling effectively.