What would you say about the tax policies which have been applied for the automobile industry in the last years? Do you agree with the viewpoint that local production has been pampered with protection?

Over the last 10 years, since 1991, the tax rates on CBU imports have stayed firm at high levels (100% on vehicles to carry people and to carry goods with the tonnage of less than 5 tonnes), while the import tax on CKD and IKD sets of car parts are always low, 3-25%.

Together with the high tax, the state maintains the policy on limiting imports by imposing the import licencing scheme (in fact, Vietnam has prohibited imports for a long time, because no import licence was granted during that time). In 1999, the state began levying luxury tax on cars, but local manufacturers could enjoy the tax reduction of 95% in the first five years.

The tax policies aimed to protect the industry in its initial stage of development. However, as Vietnam now integrates into the world’s economy, the state has been gradually reducing the protection of local production, requiring enterprises to upgrade themselves to improve their competitiveness.

First, the state has lifted the ban on car imports, allowing companies to import brand new cars since 2003, and import used cars since May 2006. Vietnam has been gradually reducing the tax on CBU imports from 100% to 90% in November 2005, to 80% in January 2007 and 70% in August 2007. Two tax cuts have been decided for used imports, and the fixed tax rate now applied is 20% lower than the initial rate.

Regarding the tax on car part imports, Vietnam began taxing individual car parts instead of CKD sets in 2006. The car parts that cannot be produced domestically are imposed low tax rates, while the car parts that can be made domestically are enjoying suitable protection levels with the tax rates of between 15% and 30%.

As for luxury tax, Vietnam has been gradually cutting the preferences local manufacturers can enjoy. Form 1999-2003, the manufacturers enjoyed the 95% tax reduction, and the reduction decreased to 70% in 2004, and 50% in 2005. Since 2006, the single luxury tax rate has been applied for both imports and local products with no discriminatory treatment.

Though the protection level has been decreased, car prices remain very high compared to the region and the world. What are the reasons behind this?

The gradual reduction of protection has been actively affecting the domestic market. You may see that in 2004-2005, local manufacturers raised the selling prices once the government raised taxes. However, the scenario did not occur in 2006. When the luxury tax was raised from 40% to 50%, car prices did not increase, but decreased slightly, and this should be seen as a result of the reduction in local production protection.

Despite the active changes, car prices in Vietnam truly are higher than those in the region and in the world. Many reasons can be cited to explain the situation, including the tax policies on car part imports, luxury tax, and VAT (luxury tax accounts for 63% of car value).

It is the legitimate aspiration of people to buy cars at reasonable prices. However, the state still does not encourage the use of cars, because Vietnam is a developing country with 70% of population being farmers who have low income. That explains why Vietnam still sets the high luxury tax rate.

How will the tax policies be built in the time to come in order to help develop the automobile industry and bring benefit to customers?

In the time to come, tax policies on cars and car parts will see adjustment through the implementation of the commitments under the framework of WTO, CEPT/AFTA, ASEAN-China, ASEAN-ROK and other commitments in the future. MOF will further reduce the protection of local production so as to encourage enterprises to heighten their competitiveness.

MOF will check the current tax policies and reduce taxes on the car parts that cannot be made domestically, or the ones that can be made domestically but do not have competitiveness. The tax reductions will be implemented under a suitable roadmap.

Source: VNEconomy.