A worker operates a packing line at theThang Long Tobacco Co Ltd. Experts say Viet Nam should raise special consumption taxes on goods like liquor and tobacco. — VNA/VNS Photo Lam Khanh

HA NOI (Biz Hub) — Viet Nam should increase special consumption taxes on goods like liquor and tobacco in "reasonable" increments over several years so as to discourage smuggling and other forms of illicit trade, experts have said.

Speaking to Viet Nam News on the sidelines of the recent 11th Asia-Pacific Tax Forum, they said that a gradual rise would also reduce the impact on consumers.

The experts were referring to increases to the special consumption tax on liquor, beer and tobacco that have been proposed in draft amendments to the Law on Special Consumption Tax.

The draft law, now under discussion, is expected to be approved this year and come into force on July 1, 2015. It seeks to hike the tax on tobacco from 65 per cent to 70 per cent on January 1, 2016, and to 75 per cent in 2019.

The tax on beer will be increased from 50 per cent to 55 per cent on July 1, 2015, to 60 per cent in 2017 and 65 per cent in 2018.

The special consumption tax on liquor with alcohol content of above 20 per cent will be raised from 50 per cent to 65 per cent and that on liquor with less than 20 degrees would be increased from 25 per cent to 35 per cent.

Daniel Witt, president of the International Tax and Investment Centre, said that gradual tax adjustments with carefully-planned roadmaps are required to avoid creating a shock and increasing smuggling and illicit trade.

"The Government of Viet Nam's approach is in the right direction," he said.

But he said "The 10 per cent increase is too high and should be set at just 5 per cent annually, the same increase proposed for beer. Again, all products should have the same, gradual tax increase."

Higher upfront increases could risk incentivising smuggling and shifting consumption to the black market as consumers would substitute consumption to other products that had not experienced the large tax increase, which would pose risks to Government revenue, he added.

Agreeing, Stephane Gripon, general director of Diageo Viet Nam, said: "The proposed increases are substantive and could have significant impacts on legitimate business if not implemented in a reasonable way.

"We are concerned that any excessive increase in tax will only lead to widespread unrecorded and untaxed alcohol."

He said the hikes should not begin before 2016 and should be phased over three or four years. More importantly, he said, this should be done equally for all alcoholic beverages – beers, wines, spirits – over the same period of time.

He suggested an increase of 5 per cent per year from 2015 to 2017.

Rob Preece, lecturer in excise at the University of Canberra, Australia, said one of the causes for increasing black market trade was that the penalties were too small, and many people would be willing to take the risk to earn high profits.

"The principle is slow adjustment to minimise unintended consequences," he said.

Witt said efficient co-ordination between relevant authorities, including police, tax and customs officials as well as the health ministry was critical to addressing the issue.

"Tax policy and rates should be neutral," he said, adding that tax increases should not hurt competitiveness. ‘Neutral' refers to a level that will not force businesses to change their economic routines to accommodate the tax.

Striking a balance in revenue, employment, investment, consumption and production was important, other experts said.

The forum heard that a two-year study into the development of excise tax policy in the context of the ASEAN Economic Community 2015 was to come out this year. This is expected to provide Viet Nam as well as its ASEAN neighbours with a roadmap to modernise excise taxation and ensure more stable revenue and consumption. — VNS