The draft’s content, which is drawing considerable discussion, includes taxable entities, tax calculation methods, tax increase roadmap, and tax rates...

For the tobacco industry, the proposal to apply a mixed tax method, adding absolute taxes, is expected to create an effective special consumption tax policy that meets the goal of increasing prices, reducing the consumption of cheap, low-quality tobacco products, and limiting youth access.

Globally, many countries have been transitioning to a mixed tax method (combining absolute and proportional taxes) as a solution to balance public health protection goals with economic stability.

International Experience with Mixed Taxation on Tobacco

Research by Oxford Economics on tobacco tax structures within the European Union (EU) indicates that countries implementing a mixed tax system with an increasing share of absolute taxes and a decreasing share of proportional taxes often experience stable or increased tax revenues, even when the consumption of legal tobacco decreases.

Latvia serves as an example of this. Prior to joining the EU in 2004, to align with EU commitments, the country primarily increased excise taxes through proportional tax hikes. However, starting in 2011, Latvia adjusted its excise tax structure by increasing the absolute tax rate and reducing the proportion of the relative tax. This change contributed to a reduction in tobacco consumption, a decrease in smuggling, and a stable increase in tax revenue by 1.7% annually from 2010 to 2022.

In contrast, countries like Italy and Spain, where absolute tax rates are low and there have been no significant changes in the tax structure, have seen a decline in tobacco tax revenues. For years, the excise tax systems in these two countries relied mainly on increasing proportional taxes, but the rate of growth in tax revenues has significantly decreased.

The reason is that when increasing proportional taxes, cheaper products have a significant advantage over higher-priced tobacco products, giving producers less incentive to raise prices compared to increasing absolute taxes. Tobacco prices are kept in check, while consumers favor cheaper options, leading to a sharp decline in tax revenue because the tax collected from cheaper tobacco brands does not increase. This phenomenon results in tax revenue shortfalls for the government, as seen in Italy from 2010 to 2022 and Spain from 2010 to 2013.

This indicates that absolute taxes play a crucial role in ensuring stable revenue for the state budget.

Considering the Tobacco Tax Increase Roadmap for Vietnam

Based on international practical experience, experts believe that the Ministry of Finance's proposal to apply a mixed tax system in the draft Special Consumption Tax Law, which is currently open for consultation, is entirely appropriate. This approach aims to both reduce tobacco consumption and increase budget revenue. However, the tax increase needs to be implemented cautiously with a clear roadmap.

In the draft amended Special Consumption Tax Law submitted for consultation since June 13, 2024, the Ministry of Finance proposes maintaining the proportional tax rate of 75% on tobacco and adding an absolute tax according to a roadmap with two options.

Specifically, Option 1 proposes an increase of 2,000 VND per pack in the first year (2026) and an annual increase of 2,000 VND per pack over the next five years, reaching a total increase of 10,000 VND per pack by 2030. Option 2 suggests an increase of 5,000 VND per pack in 2026 and an annual increase of 1,000 VND per pack, also achieving a total increase of 10,000 VND per pack by 2030.

Speaking at the workshop on improving the draft Special Consumption Tax Law organized by VCCI on July 11, Mr. Nguyen Chi Nhan, Secretary General of the Vietnam Tobacco Association (VTA), shared that, according to the Association's calculations, under the proposed Special Consumption Tax Law from 2026 to 2030, the industry's output will gradually decrease by 17% - 18%. By 2030, output will drop from 43 billion cigarettes (in 2023) to approximately 1.5 billion cigarettes. This will also lead to a corresponding reduction of about 2/3 in the area of tobacco-growing regions.

It can be seen that if VTA's calculations are realized, it will bring many difficulties to the entire industry, including manufacturing companies, raw material suppliers, and farmers in the raw material-growing regions.

From international experience, Germany has successfully stabilized tobacco tax revenues by implementing a moderate tax increase of 2% during the 2011-2015 period, even though the consumption of legal tobacco continued to decrease. Previously, Germany had significantly raised the excise tax over a four-year period (2002-2005) by 50%, which did not meet revenue expectations and led to a high increase in smuggling, forcing the country to suspend further tax increases from 2006.

In contrast, Malaysia's excessively high excise tax increase of 37% in 2015 led to a significant rise in smuggling, causing tax revenue losses for the government, while overall tobacco consumption decreased only slightly. It is estimated that around 59% of tobacco consumed in the country in 2018 was illicit, resulting in a tax revenue loss of about 2.7 billion USD.

Tobacco companies generally support the draft amended Law in line with the Party and State's policy, but they propose a more gradual tax increase roadmap and appropriate tax rates to avoid facilitating smuggling and tax revenue losses while still achieving the goal of reducing tobacco use in the community.