tax rate taxable object unit (vnd/unit) refined...
TRANSCRIPT
FAQ - Environmental Pollution Tax Law in Viet Nam -
What are the taxed objects and planned tax rates?
Viet Nam seeks to implement tax on the following commodities:
• Refined fuels (gasoline, diesel, mazut, paraffin, kerosene)
• Coal
• Hdrochlorofluorocarbon (HCFC) substances
• Soft plastic bags
• Subset of harmful chemical substances used in agriculture and forestry
Taxable object Unit Tax rate
(VND/Unit) Refined fuels
All kinds of gasoline liter 1.000-4.000
Jet fuel liter 1.000-3.000
Diesel liter 500-2.000
Paraffin liter 300-2.000
Mazut kg 300-2.000
Lubricating oil liter 300-2.000
Grease kg 300-2.000
Coal ton 6000-30.000
HCFC Substances kg 1.000-5.000
Soft Plastic Bags kg 20.000-30.000
Restricted-used plant protection chemical substances
Agriculture chemical substances kg 500 -2.000
Anti-termite chemicals kg 1.000-3.000
Preservatives for forest products kg 1.000-3.000
Disinfect chemical used for warehouses kg 1.000-3.000
Note:
Taxes are levied on the consumed physical
units rather than on percentages of prices.
This corresponds to international best
practice as the actual amounts of used
units harm the environment, independent
of its price.
FAQ - Environmental Pollution Tax Law in Viet Nam -
Impact Assessment on the draft environmental tax law in Viet Nam
Why? A quantitative evaluation of the impacts of the proposed draft law of Viet Nam on producer and user prices, sectoral output and
employment, the commodity structure of demand, government tax revenue, CO2 emissions and household welfare.
How? A simulation analysis based on a Computable General Equilibrium (CGE) model of the Vietnamese economy is used to model the
impact of the environmental tax. The CGE model is calibrated to a new Social Accounting Matrix for Vietnam. A SAM is an extension
of the national accounting system reflecting the interactions among all actors in the economy, including the production sector, the
household sector, the government sector, and the rest of the world. It is a consistent integrated snapshot of the whole economy in a
given year (here 2007).
Strengths:
The model allows for a switch to less energy-intensive modes of production in response to an increase in energy
prices. In detail, the sectoral production functions allow for imperfect substitutability between coal and a refined
oil/gas composite, and between refined oil and natural gas.
The general equilibrium approach allows quantifying the CO2 emission reductions associated with the imposition of
the environmental tax.
FAQ - Environmental Pollution Tax Law in Viet Nam -
Simulated environmental tax scenarios:
Assumptions
• The CGE analysis focuses on the taxes on coal and on refined fuels, as they
account for around 99.5% of the estimated environmental taxes.
• The other taxable objects (HCFC substances, Soft plastic bags and subset of
harmful chemical substances used in agriculture and forestry) account only
for a tiny share of domestic production and consumption and will therefore
have negligible impacts on macroeconomic variables and on tax revenue.
Nevertheless, imposing taxes on these products with negative
environmental externalities will encourage users to shift to more
environment-friendly substitutes that are available.
• The draft environmental tax law specifies a lower and an upper limit for the
specific tax rates that apply to each taxable object. Therefore, the simulation
results presented consider a Low and a High tax rate scenario.
FAQ - Environmental Pollution Tax Law in Viet Nam -
Simulation Results:
Macroeconomic Impact:
Assumptions:
• The government spreads the additional tax revenue from environmental taxes
among public investment spending, government consumption and additional
transfers to the private sector.
Main results:
• Estimated increase of environmental tax revenues by up to 37,844 1billion VND in
2012 (fully exploiting the potential of the law)
• Significant shift in the purchasing power from the households to the government
sector:
=> ↑ real government expenditure
=> ↑demand for domestic non-tradable goods
=> ↑ prices for non-tradable goods
=> ↓ discourage exports
=> ↑ real exchange rate appreciation
=> It is the household sector that bears the burden of the tax - reflected in a noticeable
drop in household consumption!
1 Equals approximately 1.5 billion Euro
Household effect
User price ↑
Income effect:
Income↓
Real PP↓
=> Reduces demand
for all consumer
goods.
Substitution effect
=> Shifts demand from
coal and refined fuels
to other goods.
Production side
price ↑ for taxed commodities
Substitution effect
Between energy
inputs
Increase in
production costs =
supply prices of
domestically
produced
commodities
FAQ - Environmental Pollution Tax Law in Viet Nam -
Simulation Results:
Impact on CO2 emissions:
Assumptions:
• The government spreads the additional tax revenue from environmental taxes
among public investment spending, government consumption and additional
transfers to the private sector.
Main results:
• The environmental tax law has the potential to reduce Viet Nam’s annual CO2
emissions by up to 7.5 %. For the year 2012, this amounts to an absolute
emission reduction of up to 9.3 million tons of CO2 (high taxation scenario).
FAQ - Environmental Pollution Tax Law in Viet Nam -
Shortcomings of the current draft law & resulting recommendations
The current draft of the environmental tax law includes already all relevant taxable objects
with the only exception of a road tax2. To overcome this shortcoming, the Vietnamese
government already plans to charge exhaust fumes soon
So far, the nominal tax rates are not indexed to inflation. But given the persisting
high inflation rates in Viet Nam, nominal specific tax rates must exceed the rate
of inflation to guarantee a positive environmental effect (otherwise the real tax
rates even decrease!)
In Viet Nam, the price of coal only equals 75% of the world and the proposed tax
rate on coal is significantly lower than the environmental tax rate on refined
fuels. The implication is that the relative user price of coal in relation to the
price of refined oils drops. To the extent that refined fuels and coal are
substitutes, this may induce undesirable substitution effects from relatively
“clean” refined fuels to relatively “dirty” coal.
.
2 Please note, that “road tax” does not mean taxing the use of a road (toll) but rather the taxation of vehicles.
The effective ad valorem tax rate of coal should exceed the tax rate on refined
fuel substitutes to avoid undesired substitution effects.
The actual nominal tax rate needs to be indexed (at least) to inflation!
Erosion of effective real tax rates in the presence of inflation
0
1
2
3
4
5
6
7
2010 2015 2020 2025 2030
Year
Ad
valo
rem
tax
rate
in %
10 % Inflation20% Inflation
FAQ - Environmental Pollution Tax Law in Viet Nam - The current draft law suggest a relatively wide range of taxes
(e.g. 1000-4000 VND/litre gasoline) without explicitly
clarifying if it is planned to increase the tax rates gradually
to the upper boundary or if this is just the inflation scope.
If it is intended to increase real taxes gradually (nominal
tax rates > inflation rates), they should be phased in
according to a transparent pre-announced time schedule
to allow firms to plan investments in fuel-efficient
technologies.
So far, the additional revenues stemming from the
environmental tax law are not earmarked for
environmental purposes (which corresponds to the non-
affectation principle). Nevertheless, international best
practice (OCED) suggests partially earmarking of the
environmental revenues to monitoring and enforcement
activities. But even without explicitly earmarking the
additional tax revenues, the Vietnamese government
could use the additional money to stimulate investments
into low carbon technologies and to promote
environmental protection activities.
Currently, the draft law does not take energy efficiency
adequately into account. The aim should be to set
incentives to reduce the input of natural resources and to
stimulate the shift towards low carbon technologies by a)
increasing taxes on fossil energies while b) reducing taxes
on renewable and efficient technology applications – a tax
differentiation is often very successfully internationally
applied
Develop a mid – and long term roadmap for the gradual
increase of environmental taxes to ensure investment
certainty and to facilitate a smooth low-carbon technology
transition.
Use the additional revenues for monitoring and
enforcement activities as well environmental purposes.
Stimulate investments in energy efficiency and renewables
FAQ - Environmental Pollution Tax Law in Viet Nam -
The impact assessment results at a glance:
• The refined liquid fuels taxes will be the dominant
source of tax revenue
• The results suggest that CO2 emissions drop by
around 2.3% under the Low and by 7.5% under the
High tax rate scenario. For the year 2012, this
amounts to an absolute emission reduction of up
to 9.3 million tons of CO2 (high taxation scenario)
• At the higher end of the proposed tax rate band,
the environmental tax on fuels will have
noticeable economy-wide repercussions.
• The tax-induced fuel price increases raises the
production costs and the output prices of other
fuel-intensive sectors – most notably for the fishing
and the transport sector.
• The tax-induced rise in the cost of transport
services spreads the impact of the fuel tax widely
across the economy through its effect on transport
margins for all non-service commodities.
• At high levels of the tax rate, the environmental tax
shifts a significant amount of purchasing power
from households to the government (37.844
billion VND3 additional tax revenues)
• As the additional tax revenue is spent on
environmental protection measures (or other non-
traded goods and services), the real exchange rate
appreciates to some extent and real exports
decline slightly relative to the no-eco-tax growth
path
• Household welfare – narrowly defined as utility
derived from the consumption of private goods –
declines significantly across all households groups.
However, this result does not take account of
future welfare gains due to beneficial
environmental impacts.
• There is a need for supportive measures to
facilitate a smooth low-carbon technology
transition.
3 This equals approximately 1.5 billion EURO
FAQ - Environmental Pollution Tax Law in Viet Nam -
Policy recommendations at a glance
• Include the explanations in the accompanying texts
or a separate FAQ-document.
• Develop a mid- and long term roadmap for
environmental tax and fiscal reform including slow
and gradual increase of the environmental taxes
• Announce the gradual increase of the taxes in
advance.
• Adjust the environmental taxes at least to inflation.
• Use the additional revenues for environmental
purposes.
• Stimulate investments in energy efficiency and
renewables.
• Increase taxes on coal.
• Increase public awareness for EFR.
• Include an Annual Road Tax in the future