Vietnam – Japan University

Vietnam National University

PUBLIC POLICY ANALYSIS

FINAL TERM REPORT

SPECIAL CONSUMPTION TAX POLICY ON AUTOMOBILE INDUSTRY IN

VIETNAM

Name: Pham Thi Lan Huong

Student ID: 17110084
Program: Master of Public Policy
Word count: 4520

Hanoi, May 2018

 EXECUTIVE SUMMARY
The automobile industry of Vietnam is weak and vulnerable due to strong
competitions from the imported cars and automobile products of foreign owned
enterprises. To stimulate the development of automobile industry, a solution is to
control the consumption of consumers in the market. Special Tax Consumption
along with other tax measures an effective tool to raise the price of the products in
order to discourage citizens to consume them. The imposition of Special
Consumption Tax will raise the price paid by buyers and reduce the price that sellers
gets. This effect on price lessen the incentive of consumer to buy and producers to
produce more. On November 14th, 2008, government promulgated Special
Consumption Tax Law on a limited number of products that their consumption
need to be control in order to guide the citizens consume wiser and more
appropriate. Along with other products such as cigarette and airplane, the special
consumption tax is imposed on automobile products with the aim to reduce the
consumption of imported automobile products, thus, create opportunities for the
production of domestic enterprises. The implementation of Special Consumption
Tax has brought many achievement such as reduce the consumption of products
that have negative effects on health such as cigarette and alcohol. It also create a
stable contribution to the national budget. However, due to the irresponsible of
some government officers and the inefficient of tax collection management system,
there are several case of tax avoidance that affect the efficiency of the
implementation of Special Tax Consumption. In order to avoid these situations, it
is necessary to strengthen the quality of government officers working in the tax
department and provide stronger punishment to solve the cases of tax avoidance.
 CITIZEN-FRIENDLY SUMMARY
To promote and support the development of domestic firms in automobile
industry, the government want to make citizens consume less of foreign brand
automobile products by raise the price of these products. On November 14th, 2008,
the government promulgated the Special Tax Consumption Law in order to achieve
this goal. Since January 1st, 2010, the automobile products in Vietnam market are
subjects to this tax. This tax only imposed on products that the government do not
encourage people to consume for many reasons. The main reason is that these
products have bad effect on health such as alcohol and cigarette or they are luxury
products that are not necessary needed in daily life such as airplane and boat. In
the case of automobile and petrol, the reason is the government want to protect
the domestic enterprises and promote the development of these industries. Since
then, the implementation of special consumption tax gained many achievements,
and contribute a lot to the national budget through tax collection. However, the
management of tax collection is loose and the attitude and responsibility of many
government officers that work in tax department is not good. In many cases, they
accept bribe from companies and individuals and allow tax evasions. This becomes
very common and affect a lot to the efficiency of the objectives of reducing
imported cars consumption of the special tax consumption law. Therefore, the
government need to train and supervise the tax officers more careful and impose
strict regulations to punish the cases of avoiding tax responsibility. This will help to
strengthen and promote the efficiency of the Special Consumption Tax Law.
 1. Introduction
Since Doi moi reform in 1986, the economic situation of Vietnam has
experienced an upward trend in development. After the first two decades of the
renovation (Doi moi), from 1986 to 2006, Vietnam had gained remarkable
achievements with average growth rate of 7.5% per year. 1 According to World
Bank, GDP of Vietnam in 2016 was 205.28 billion USD, more than seven times
compare to the GDP value in 1986 (26.34 billion USD). Thus, we can see a rapid
growth of Vietnam economy over the years, except for some plummet in 1997 and
2008 due to the Asian financial crisis and global economic crisis, respectively.
Among other major industries such as technology equipment, garment, footwear
manufacturing and fishery, the automobile also contribute a lot to the nation
economy. This is also an industry with high potential for development in the
upcoming years. The growth rate of automobile market in the five recent years is
quite high (about 24%). Beside, in the context of globalization and the growing
formation of free trade agreements between Vietnam and other countries such as
the Comprehensive and Progressive Trans-Pacific Partnership Agreement (CPTPP),
the Vietnam – EU Free Trade Agreement (EVFTA) and the Asian Economic
Community (AEC),.. Vietnam’s automobile has more opportunities to export to
partners countries. Therefore, automobile is an important industry in Vietnam.
However, compare to strong competitors in the market such as Japan, Korea,
America, Italy and Germany, Vietnam automobile industry is rather vulnerable and
weak. Hence, since the early days, this industry has been relied strongly on the
policy of the government. The automobile industry in Vietnam was official

1
Hoang Vuong Quan (2014), Vietnam's Political Economy in Transition (1986-2016). Access on May 18th, 2018 at
https://worldview.stratfor.com/article/vietnams-political-economy-transition-1986-2016.

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established in 1991 since the establishment of the first two automobile assemble
companies. Since then, the number of companies in this field had increased
gradually to its peak with 52 companies.2 After that, some of them cannot operate
well and have to shut down. Since then, the number of automobile companies in
Vietnam up to 2010 is 18 companies.
Similar to many other countries, taxation system is of great important in
contribution to the national budget and protect domestic industries. Special
consumption tax in a kind of indirect tax that imposed on the goods that
government not encourage citizens to consume due to many reasons which are
luxury goods that not necessary in daily life and goods that have bad effects on
health such as cigarette and soft drink. Another reason to apply special
consumption tax is to protect the underdeveloped industries from the competition
of imported goods, which is the case of the automobile industry. In the context of
trade liberalization, special tax consumption’s role in protecting domestic
enterprises becoming more essential. It is a difficult task to identify the target to
impose the tax because the tax can has direct impacts on those who involved in the
tax imposed firms such as the labor of these companies and the attractiveness of
the industry that applied the special consumption tax. Once the tax is applied, it is
more difficult for the foreign enterprises because they now have to bear higher
production cost, thus, it will lessen the attractiveness to FDI investors into this field.
However, the identification of imposed targets not only depend on the well-being
of individuals but also need to base on the objectives of the government tax policy

2
Nham Phong Tuan and Tran Duc Hiep (2014), The impact of policies on the development of supporting
automobile industry in Vietnam, Vietnam National University Science Magazines: Economic and Business, Episode
30, No.4 (2014), 12-20.

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in certain period since it need to stay in line with the general objectives of the
country in that period.
Based on the assessment of application of special consumption tax in cigarette
industries, the tax has proved to be the most effective way among others measure
in order to reduce the cigarette consumption of people. Therefore, it is important
to understand and assess the application of tax measure in the automobile case to
see the real impact on the automobile of the country.
2. Preliminary ideas/hypotheses
The goal of the Special Consumption Tax is to reduce the consumption of certain
goods in the market. In the case of special consumption tax for automobile, the
ultimate goal is actually to promote and support the development of the domestic
automobile industry. For the realization of this goal, the intermediate goal is
reduce the consumption of imported cars by citizens. Hence, the means here to
achieve this goal is the proposed Special Consumption Law, which aims at the
imported cars. According to this, the SCT Law was promulgated in 2008.

Figure 1. The formal logical framework of the Special Consumption Tax Law
on automobile industry
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Source: Author’s synthesis adapted from the framework of professor Yanagihara’s
course, April 2018
The set out hypothesis between the action and result of the policy is that the
imposed of tax on imported good will increases the price of imported goods and
make them relatively more expensive than the domestic products, hence, as a
rational consumer, people will buy less foreign car and change to buy more
domestic cars instead.

Figure 2. The imposition of a tax

Source: Varian, H. R. (1987)
From figure 2, we can see that the dividend of tax does not depend on who the
tax in imposed on. Regardless who bear the tax, the equilibrium price paid by buyer
and seller will be the same either way. Under the tax burden, both are loss in the
sense that buyer has to buy with the higher price (Pd> P*) and seller get a lower
price than the initial equilibrium price without tax (Ps< P*). This implies that with
the tax, apparently that the price of goods will increases. Since the SCT on
automobile mostly aims at imported cars, the price of these cars due to tax will
rises, make their price become relatively more expensive than the cars that
produced in the country and induce the consumers to buy more domestic cars.

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 3. Method of investigation
The research objects of this paper are the regulations in the Special Consumption
Tax Law in general and particular the regulations on automobile products. The
scope of research is focus on the automobile market of Vietnam with the time rage
from 2010 since the law of special consumption tax officially came into effect.
In the case of research method, this paper uses qualitative method to assess the
impact of the policy on automobile industry. To be more specific, the following
method are used:
Synthesis and analysis data method used to provide an overview of the SCT Law
and the situation of the implantation of this policy in the automobile market in
Vietnam.
Comparison method used to identify the differences or similarities between the
regulations of Vietnam and other countries regarding the SCT Law and base on that
to analyze and propose some implications to improve the current SCT Law.
4. Literature review
Policy on special consumption tax, especially on automobile products is a
debated topic for society since the day it promulgated. It is understandable for the
concern of public over this policy because there are lots of objects involved and can
be affect by this policy such as the government, the labor who work in automobile
industry, the FDI investors and the owners of domestic automobile companies.
Due to that, there are several papers related this topic but they mostly are
newspaper and students level researches. These papers tend to analyze the special
consumption tax as well as it imposed targets in a general way, which does not
focus on specific subjects. Therefore, the number of reliable academic researches

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about the special consumption tax policy on automobile products in Vietnam is still
limited.
Phung Thi Ngoc Nhu (2006) had provided a general picture of the contents
related to Special Consumption Tax such as the subject of the tax, the method to
calculate the tax and the case of elimination and reduction tax. This study focus
mainly on analyzing the role of special consumption tax before Vietnam join WTO.
Hence, the data is quite outdate and it cannot reflect the current situation of the
tax.
Cao Thi Thuy Nhu (2012) focus on researching and analyzing the regulations
related to the objects of special consumption tax, about their characteristics, the
reason why they are classified as the targets to imposed SCT, the change in tax
policy over each period. The author also provide an overview about the situation
of applying these regulations in practical, assess the efficiency of them and suggest
the recommendation for the improvement and completion.
Study of Nguyen Thi Thanh Hang (2008) aimed at analyzing a specific target
which is the cigarette industry. The paper showed the negative impacts of cigarette
on health and the role of special consumption tax law on reducing the consumption
of cigarette in Vietnam.
Nham Phong Tuan and Tran Duc Hiep (2014) analyze the influence of
government policies on the development of the supporting automobile industry in
Vietnam, which are the policy to attract FDI, policy to develop new enterprise and
economic zones and the tax and financial support policy group. The findings
provided were that the automobile supporting industry has gained remarkable
achievements, however it still not adequate compare to the real potential of the
industry. In this study, the author also analyze the impact of special consumption

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tax regulations on automobile but the analysis rather general and mainly focus on
the supporting industry.
Therefore, based on the above literature review, we can see that the number of
researches on the impact of special consumption tax law on automobile industry in
Vietnam is quite limited. Besides, they were mainly done by Vietnamese authors,
and focus on the special consumption tax regulations on all targeted subjects or
other industries such as cigarette.
5. Analysis
 Overview of Special Consumption Tax
In Vietnam, the Special Consumption Tax was first promulgated in 1990 in the
tax reform program phase I. In the implementation process, the SCT Law had been
revise several time in order to meet the development objectives of the country in
each period. The most important amend of SCT Law was in 1998, 2003 and 2005.
On November 14th 2008, the current Special Tax Consumption Law (SCT) was
promulgated and then came into effect on April 1, 2009 (except for two goods
alcohol and beer, which was applicable since January 1st, 2010). According to the
Special Consumption Tax is levied on the production and importation of 11 types
of products and 6 types of services that are considered to be luxuries, not necessary
or have bad impacts on health (Table 1).

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 Table 1. SCT rate by Good/ service
SCT Rate by Good/Service
No. Good SCT rate No. Service SCT rate
1 Cigar/ Cigarette 65% 1 Dancing hall 40%
2 Alcohol/ Wine (from 25-45% 2 Massage, 30%
01/01/2013, tax rate is 25- karaoke
50%)
3 Beer (from 01/01/2013, tax 45% 3 Casino, 30%
rate is 50%) jackpot games
4 Automobile with less than 24 10-605 4 Entertainment 30%
seats involving
betting
5 Motorcycle of cylinder 20% 5 Golf 20%
capacity above 125cm3
6 Airplane 30% 6 Lottery 15%
7 Boat 10%
8 Petrol 10%
9 Air-conditioner (not more than 10%
90,000 British thermal units
(BTU)
10 Playing cards 40%
11 Votive paper 70%
Source: http://www.vietnam-briefing.com
Generally, goods and services that imposed with SCT charges are also subject to
VAT charges. The basic of VAT is the selling price plus the SCT. For imported
products, VAT is imposed on the dutiable value plus import duties and SCT.
Regarding the characteristic, for the starters, special consumption tax is an
indirect tax, which is the tax that collected by one entity in the market (usually the
producer or the retailer) and then paid to the government. Nevertheless, the
burden of tax not only place on the supply side but also pass on to the consumer

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as part of the purchase price of the good. The consumer is ultimately paying the tax
in the sense that they have to pay more to buy the good. Secondly, Special
Consumption Tax is consumption tax, but it is different from the corporate income
tax and value added tax since SCT only aims at limited number of products that the
government want to control the quantity of consumption. Thirdly, SCT usually
imposed at high level of tax rate in order to control and reduce the production and
consumption of certain goods and services. Fourthly, collection system of SCT are
usually similar in many countries, which government only collect tax once at the
production, import or sale of the products.
Theoretically, special consumption tax play important role in contribute to
national budget and an efficient measure of the government to control and direct
the production and consumption of citizens. As we can see form table 1 above, the
number of products that are targets of SCT is limited, and they mainly are products
that the government do not encourage people to consume such as luxury products
(airplane, boat,…) or products that effect negatively on health (cigarette, alcohol,
soft drink,…). In the case of automobile products, the tax aimed heavily at imported
automobile cars with the desire to protect and support the domestic products.
Table 2. Special Consumption Tax on automobile products
Goods/ Services SCT rate
4. Automobile with less than 24 seats
a) Passenger cars of 9 seats or fewer, except those specified at Points 4e, 4f and
4g of this Article) Passenger
Of a cylinder capacity of 2,000 cm3 or less 45
Of a cylinder capacity of between over 2,000 50
cm3 and 3,000 cm3

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 Of a cylinder capacity of over 3,000 cm3 60
b/ Passenger cars of between 10 seats and under 30
16 seats, except those specified at Points 4e, 4f and
4g of this Article
c/ Passenger cars of between 16 seats and under 15
24 seats, except those specified at Points 4e, 4f and
4g of this Article
d/ Cars for both passenger and cargo 15
transportation, except those specified at Points 4e,
4f and 4g of this Article
e/ Cars running on gasoline in combination with 70% of the tax rate for cars
electricity or bio-fuel, with gasoline accounting for of the same kind as
not more than 70% of the used fuel specified at Points 4a, 4b, 4c
and 4d of this table
f/ Cars running on bio-fuel 50% of the tax rate for cars
of the same type as
specified at Points 4a, 4b, 4c
and 4d of this table
g/ Electrically-operated cars
Passenger cars of 9 seats or fewer 25
Passenger cars of between 10 seats and under 15
16 seats
Passenger cars of between 16 seats and under 10
24 seats

10
 Cars for both passenger and cargo 10
transportation
Source: http://www.sblaw.vn/special-consumption-tax/
According to the Special Consumption Tax Law that came into effect on May 20,
1998, cars with less than 24 seats are imposed with a tax rate of 100-30%. Under
this law, the government has insisted in protecting the domestic automobile
production, and along with the corporate tax incentives for startups and foreign
owned enterprises, this is a very good opportunities for them to invest in producing
cars and compete with other imported cars.
After 6 years of implementation, in 2004, the National Asembly promulgated the
amending and supplementing law a number of articles for automobiles with less
than 24 seats: fall in tax rate from 85 to 25% (compared with the law in 1998 is 100-
30%). In Article 16 of this Law, domestic automobile manufacturers still considered
in the reduction of the special consumption tax rate by 2004 down to 70%, in 2005
reduced by 50%, in 2006 decreased by 30%, in 2007 subjected to the exact tax rates
as prescribed. Thus, the supporting companies that produce part and components
of automobiles have 3 years to prepare for the increase of SCT, so that in 2007
when Vietnam joint WTO, their SCT rate will be equal to the tariff rate of imported
cars. According to this, imported vehicles can benefit from reduction of SCT while
the domestic automobiles have to bear the higher tax rate. This is in contrast with
the initial intention of the government that want to protect the domestic enterprise.
Obviously, this law had influent greatly to the automobile industry in the country
and the supporting industrial, in the context of vulnerable and rather low
competitiveness of the domestic automobile companies. Therefore, at the National
Assembly Meeting XII, a new version with also the current Special Consumption

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Law was approved on 14/11/2008. Under this law, all automobiles with less than
24 seats are reduced in SCT rate to 60-10%.
 The situation of implementation of Special Consumption Tax Law in general
and on the automobile products
Since the promulgation in 2008 and officially came into effect in 2010, the
implementation of SCT Law has gain several achievements:
Firstly, the SCT helped to guide and direct the production and consumption of
citizens and adjust income of citizens and contribute a lot to the national budget.
Secondly, the SCT Law partly ensure the commitment of Vietnam when
participate in the World Trade Organization, make sure Vietnam meet the
requirement of national standard in tax system.
Thirdly, SCT provide a stable revenue source for the national budget. Annual
revenue come from the collection of SCT accounts for 8% to 9% in the total revenue
from tax and around 1.8% to 2.6% GDP (Ministry of Finance). In total tax revenue
from special consumption tax, the revenue of tax from automobile, cigarette,
alcohol and beer have the highest proportion (Table 3).
Table 3. Tax revenue from Special Consumption Tax (Unit: billion VND)
2010 2011 2012 2013
Total tax revenue 588.428 721.804 734.883 822
Total tax revenue from SCT: 52.178 62.501 59.416 71.516
- Domestic 39.893 47.274 49.704 59.772
- Imported 10.856 15.783 11.039 11.744
Proportion on total tax revenue 8.87 8.66 8.09 8.7
(%)
GDP 1980.91 2536.6 3245.4 3584.3

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 Proportion on GDP (%) 1.63 2.46 1.83 2
Source: Ministry of Finance (2014)
Beside the achievement, the implementation of special consumption tax in the
recent years still has several limitations. Firstly, the implementation, execution and
management is not efficient. The lack of technology in supervise and support the
tax collection affect largely on the efficiency of the application of taxes in general
and special consumption tax in particular. This is one of the reasons that causes tax
avoidance. Secondly, the use of tax invoice also create many undesirable situation
such as lagged in issuing invoices, fake and inaccurate information in invoice.
Though the application of tax invoice also contribute to the management of the tax
collection, the management of issuing and using tax invoice quite lenient which
encourage many individuals to violate the regulation, using fake invoice to avoid
tax. Thirdly, regarding the imposed and not imposed targets of SCT, in general the
subjects of SCT in Vietnam is very limited and not reasonable. At the present, there
are 17 types of goods and services under the SCT regulations (Table 1). On one hand,
many goods and services are supposed to be imposed SCT but in fact does not
under the SCT such as high-class electronic devices and equipment and soft drinks.
On the other hand, many products that need to be encourage to consume but are
still imposed SCT such as automobile with 16-24 seats. Fourthly, in the case of
cigarette, the SCT does not manage to cover all types of cigarettes in the markets.
Fifthly, the current SCT regulation on automobile products based on the number of
seats with seven types of SCT rate. However, relying only on the number of seats
to regulate and identify the tax rate is not efficient. The regulation of tax rate
should base on the cylinder capacity, which many countries are applying. Sixthly,
there are too many policy documents that include regulations of SCT, which makes

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the application of SCT becomes more complicated. Moreover, the situation of
government officers in tax management are irresponsible for the tax avoidance still
ubiquitous. Some of the officers even accept bribe to help citizens commit tax
avoidance behaviors. In that context, the measure to punish the case of tax
avoidance is rather lenient, thus, it does not have strong enough effect on warning
and ensure people to obey the rule.
Due to the number of tax officers working in Tax Department is very limited, they
cannot not cover all the situation of all the companies and individuals in automobile
market, thus, consumers who commit acts of tax evasion and tax fraud increasingly
sophisticated. Meanwhile, there are many unprocessed documents, lead to
unqualified answer to the problem and the citizens that have issues and question
with the application of tax cannot get the answers.
6. Conclusion and suggestion for further research
Special Consumption Tax along with other tax measures are important tools of
the government to control and guide the direction of consumption and production
of citizens and also create a stable source of revenue for the national budget. In the
context of rapid globalization economy, the domestic enterprises have to face
strong competitions from other imported goods and FDI enterprises, especially for
the vulnerable and low competitiveness industry such as the automobile industries.
Therefore, the imposition of special consumption tax can be useful in reducing the
consumption of imported cars and create opportunities to the domestic
automobiles companies. Since the first days of promulgation and came into effect,
the implementation and execution of special consumption tax law has achieve
several achievements in contributing to the national budget and also help to reduce
the consumption of products such as cigarette and alcohol. However, due to the

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loose regulations of tax collection, and degenerated and crooked tax officers, the
management of SCT collection still not effective. This has make the pace for the
citizens commit tax evasion easily and more often. Therefore, in order to promote
the efficiency of special consumption tax in practice, beside the reform and
adjustment of SCT law, the government also need to strengthen the management
system, supervise strictly the quality of tax department officers, and promulgate
strict regulations for punishment to reduce the number of tax avoidance.
This paper still have limitation due to the shortage of data and mainly use the
qualitative. Therefore, further research into this topic should try to update more
data and apply the quantitative method in order to analyze and provide the
measurable impacts of the special tax consumption on the automobile products.

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 7. Reference
1. Varian, H. R. (1987). Intermediate Microeconomics; a modern approach (No.
04; HB172, V3y.).
2. Hoang Vuong Quan (2014), Vietnam's Political Economy in Transition (1986-
2016). Access on May 18th, 2018 at
https://worldview.stratfor.com/article/vietnams-political-economy-transition-
1986-2016.
3. Nham Phong Tuan and Tran Duc Hiep (2014), The impact of policies on the
development of supporting automobile industry in Vietnam, Vietnam National
University Science Magazines: Economic and Business, Episode 30, No.4 (2014), 12-
20.
4. Handouts of Public Policy Analysis Course by Professor Toru Yanagihara, April
2018, Vietnam Japan University, Vietnam.
5. Nguyen Thi Thanh Hang (2008), Special Consumption Tax, an efficient legal
measure in reducing the consumption of cigarette in Vietnam, Ho Chi Minh Law
University.
6. Phung Thi Ngoc Thu (2006), Special Consumption Tax Law in the context of
joining WTO.
7. Cao Thi Thuy Nhu (2012), Law on the subjects of special consumption tax.
8. Special Consumption Tax Law, 1990, National Assembly Meeting VIII,
approved on June 30th, 1990.
9. Special Consumption Tax Law, No. 27/2008/QH12, National Assembly
Meeting XII, approved on November 28th, 2008.

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