Vietnam - Gov’t should help businesses survive with tax incentives

A long-term cost/benefit analysis of tax policy against state revenues and spending could benefit the country as corporate taxes account for a major portion of revenues

A man leaves away after closing his factory, which makes blankets, pillows and mattresses, in Ngoc Nu village outside Hanoi June 23, 2011. As Vietnam fights to beat back raging inflation, many of its small and mid-sized businesses, disadvantaged even in good times, are struggling to survive the battle.

Last week at a meeting of the National Assembly’s Standing Committee, it was announced that 48,700 companies have closed down or temporarily stopped operations in the first nine months of this year.

The number increased 21.8 percent compared to the same period last year.

However, surprisingly, budget revenues have achieved VND467.1 trillion (US$22.4 billion) as of September, accounting for 78.5 percent of the year’s projected revenues, according to statistics recently released by the General Statistics Office.

As a major part of the revenues comes from taxes paid by companies, the figures have people asking why budget revenues are so high while tens of thousands of businesses have gone bankrupt.

There are two possible answers to the question. First, perhaps the bankrupt companies never paid any taxes in the first place. Second, maybe active businesses are being burdened with increasing taxes to cover the losses caused by others’ liquidation.

With the variety of difficulties like high input costs, and high interest rates, the tax burden is possibly pushing local businesses to the verge of bankruptcy, or prompting them into tax evasion.

However, these are just part of the burden’s implied problems.

When revenues increase, expenses tend to go up as well. In fact, despite government efforts, public spending hasn’t been cut effectively, as pointed out in critiques launched by the National Assembly’s Finance and Budget Standing Committee at its most recent meeting.

Over the past few years, Vietnam’s budget revenues have increased continuously. In the 1990s, the takings accounted for 15-17 percent of the Gross Domestic Product, and the figure increased to some 20-22 percent in 2000. Now it accounts for up to 28-30 percent of GDP. The rate, if compared to the 15-17 percent rate of other developing countries, and China’s 20 percent, is quite high.

The trend seems like it will continue next year with the latest figures. This wouldn’t have been a problem if Vietnam’s current economy didn’t face so many troubles, including high inflation.

It is well known that the greatest deficiency of local businesses is the lack of capital, be it big or small companies. The weakness makes them lose not only on the world market, but on the domestic front as well. In other words, they are currently in need of support, especially given the current circumstances.

The government should adjust related policies, allowing companies to save capital for re-investment. That’s not to mention that decreased taxes will give companies a chance to re-structure and prepare for new challenges after the global crisis ends.

By Nguyen Hang

Business & Investment Opportunities
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