Tax Law No 71/2014/QH13, which treats fertiliser as a VAT-free item, has become a double-edged sword as after five years of implementation it has not reduced domestic fertiliser prices but instead hindered production and investment in the sector.

The Phu My fertiliser plant 

With the aim of cutting fertiliser production costs to help farmers post higher profits, the law, which took effect in January 2015, stipulates that fertiliser and machinery and equipment in service of agricultural production are not subject to value added tax (VAT). This applies to all relevant import, manufacturing, and trade processes. However, according to the Fertiliser Association of Vietnam, since 2015, the cost of urea, DAP, NPK, and organic fertilisers have increased by 5-8%.

The elimination of VAT on fertiliser also means that fertiliser companies can no longer deduct the VAT they paid on inputs and instead increase their prices to earn the same revenue.

Meanwhile, imported fertiliser is sold at prices lower than domestically-made equivalents, as the former enjoy a 5% VAT reduction. While neighbouring countries have adopted tax policies to support domestic fertiliser enterprises, Vietnam must cut import tariffs under its commitments in many free trade agreements. This has negatively affected sales of local fertiliser as producers struggle to compete with imports, forcing many to cut production.

According to figures from the General Department of Vietnam Customs, fertiliser imports in 2014 (before Law 71 was introduced) totalled just 3.7 million tonnes. Despite the fact that domestic fertiliser plants are fully capable of supplying sufficient volumes of urea, phosphorus, and NPK fertiliser to the local market, since 2015 Vietnam has annually imported more than 4 million tonnes worth US$1.33 billion from China, Indonesia, Malaysia, the Philippines, Russia, the Middle East, and elsewhere.

Figures from the Ministry of Agriculture and Rural Development show that in 2018, the country spent close to US$70 million on buying more than 600 tonnes of urea fertiliser from overseas, mostly Russia and China. In the first nine months of 2019, imports posted double-digit growth. Meanwhile, the PetroVietnam Camau Fertiliser Joint Stock Company and the PetroVietnam Fertiliser & Chemicals Corporation, whose products make up 70% of the local market, have faced a host of challenges in terms of gas shortage and higher gas prices.

Hoang Van Cuong, a member of the National Assembly’s Finance-Budget Committee, said that the VAT elimination policy has inadvertently supported imports rather than domestic production.

If fertiliser was to be added to the list of products subject to VAT, imports would also share the cost, he noted, adding that the tax may increase fertiliser prices but would also improve the competitiveness of domestic companies.

Vietnam has approximately 13 million ha of arable land, with about 7,000 different brands of fertiliser products now available on the market.

As domestic prices rise, farmers have turned to imported or even contraband and fake fertiliser. According to the Ministry of Industry and Trade, its market management force tackles some 3,000 cases related to contraband and fake fertiliser on average each year.

Experts said that if fake fertiliser caused damage of US$200 on each hectare, it would cost Vietnam’s agricultural sector some US$2.6 billion annually. Even worse, it would reduce the quality of local farm produce, to the detriment of exports.

Insiders said the farming sector is expecting the law to be amended as soon as possible, as the reliance on imported fertiliser cannot ensure sustainable growth. Appropriate changes would spur the development of domestic producers, creating favourable conditions for them to apply technological advances in production and turn out quality products.