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Businesses adjust to new VAT law
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On June 3, the National Assembly passed a new law on Value-Added Tax (VAT). It will take effect on January 1 and replaces a law passed in 2003. As is the case for most laws, it is quite succinct and will require sub-categories of documents to guide its implementation.
In this article, we review some new and amended contents in the new law.
Non-taxable objects
Firstly, agriculture-related services are broadened. Apart from irrigation and drainage covered in the current regulations, exemptions from VAT will be extended to ploughing and harrowing land, dredging canals and ditches inside fields for agricultural production and harvesting.
The new law also exempts raw materials imported for manufacture or processing of goods for export, goods and services purchased and sold between foreign parties and non-tariff zones - or purchased and sold between non-tariff zones.
Continuing exemption will also be applied to credit services, securities-business activities, assignment of capital, and derivative financial services, including interest-rate swaps, forward contracts, futures contracts, options, foreign currency sales and other derivative financial services as stipulated by law - as well as telecommunication and/or postal services for social and public use.
In the meantime, international transport will be subject to a zero tax rate instead of being made VAT exempt, as at present.
Under the new regulations, VAT exemption will no longer be provided for the following goods and services:
1. Specialised machinery, equipment or transportation that forms part of a technological process, and construction materials imported to form the fixed assets of enterprises. This could result in major increases of cost for businesses.
2. Non-profit-making cultural, exhibition and sports activities; artistic performances, film production; the importation, publication and screening of film footage and documentary videos.
3. Geological surveys, exploration, measuring and formulation of maps characterised as surveys of the State.
4. Clean water produced by organisations and individuals for consumption in rural, mountain-ous and island areas and remote and distant regions.
Big question
The question is whether this restriction on clean water embarrasses or obstructs foreign and domestic incentives and projects aimed at improving conditions for residents in regions with difficult or special difficult socio-economic conditions.
Tax rates
The new law abandons the enumeration methodology used by the previous regulations. In fact, while the 2003 law provided three categories of tax rates - zero per cent, five per cent, and 10 per cent for each group of goods and services - the new law uses an elimination approach.
It provides two groups of goods and services that can receive tax rates of zero per cent and five per cent. The remaining goods and services will be subject to a tax rate of 10 per cent.
The tax rate of zero per cent shall apply to exported goods and services, international transportation, and to exported goods and services not subject to VAT.
However, the following are exemptions: technology transfers and intellectual-property transfers to foreign countries; reinsurance offshore; credit services, assignment of capital and derivative financial services; post and telecommunications services; and exports of unprocessed natural resources and minerals.
For the difference between VAT exempt and the tax rate of zero per cent, the new law retains a provision stating that except where the tax rate of zero per cent applies, business establishments will not be entitled to a credit and refund of input VAT for goods and services used to make products exempt from VAT.
Tax deductions
As a new point, the new law permits the deduction of input VAT, levied on fixed assets used in manufacturing of and business for both value-added taxable goods and services and non-taxable goods and services
Besides, the present three-month time limit for claiming input VAT credits has been removed. In addition, business establishments can amend an incorrect input VAT declaration within six months of an error occurring.
Finally, the new regulations stipulate that one of the conditions for claiming input VAT is that there is evidence of payment via a bank for the input purchased goods and services, except for purchases of goods and services with a value below VND20 million.
This currently applies only to exported goods and services.
The above changes, in particular the VAT exemption for imported special machinery, equipment and transport, will have considerable impacts on activities of business establishments reconsidering supplies and cash flows.
At the same time, the changes create a flatter playing ground to suppliers. This also complies with a fundamental principle: goods and services locally consumed will be subject to VAT. The problem is if, and how, Vietnamese enterprises catch the opportunity to become suppliers.
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