BNEWS: In the upcoming October session, the National Assembly is expected to review and approve the proposal to subject fertilizers to a 5% VAT. Will the domestic selling price of fertilizers decrease when businesses can deduct input tax?

Phu My NPK bio-fertilizer products from the PetroVietnam Fertilizer and Chemicals Corporation. Photo: PVFCCo

According to Law No. 71/2014/QH13 amending and supplementing several tax laws, fertilizers are not subject to value-added tax (VAT). After 10 years of implementation, Law No. 71 has revealed many shortcomings. In the upcoming October session, the National Assembly is expected to review and approve the proposal to subject fertilizers to a 5% VAT. However, there are still opposing views on this proposal that must be clarified to achieve the highest consensus.

Impact of VAT on fertilizer prices

The switch from a 5% VAT to no VAT in 2014 was expected to benefit businesses and farmers, but the reality differed from initial intentions. Previously, fertilizer production incurred a 10% input tax and a 5% output tax, with input tax being deductible and even refundable if it exceeded the output tax. With the new regulation, businesses could not deduct input tax, leading to higher production costs, which were reflected in the final selling prices for farmers.

Theoretically, changing the VAT status for fertilizers could have two opposite effects, depending on the proportion of input costs subject to 10% VAT in the product’s pre-VAT selling price. If this proportion is low, for example, 10%, while the remaining 90% consists of non-VAT items like imported raw fertilizers, wages, depreciation, and profits, the absence of a 5% VAT on the selling price would reduce the price compared to when the output tax was 5% and input tax was deductible. This scenario could occur with businesses producing NPK fertilizers using imported single fertilizers (exempt from VAT).

Conversely, suppose the input tax proportion is high, 50% or more, common among Vietnamese fertilizer producers. In that case, the input VAT exceeds the output VAT, and exemption from the 5% output tax without input tax deduction leads to higher production costs compared to a 5% VAT scenario. This results in higher selling prices for farmers, benefiting only imports. Additionally, increased production costs deter investment in domestic fertilizer production, particularly high-tech projects that cannot claim VAT refunds for facilities, equipment, and materials. Consequently, the domestic fertilizer industry loses competitiveness to imports and risks being overtaken in the local market.

Benefits of applying 5% VAT on fertilizers

The stable production line of Phu My NPK. Photo: PVFCCo

If the proposal to subject fertilizers to a 5% VAT is approved, businesses, farmers, and the state will all benefit.

Domestic fertilizer producers will receive partial VAT refunds since the 5% output tax is lower than the 10% input tax, reducing production costs and potentially lowering selling prices for farmers.

Applying a 5% VAT will level the playing field for domestic and imported fertilizers, ensuring fair competition and addressing the irrationality that has persisted for 10 years.

Additionally, the current budget shortfall will be partially offset by import taxes while maintaining stable domestic prices.

Will domestic fertilizer prices decrease?

Mr. Nguyen Van Phung, former Director of the Large Enterprise Tax Management Department, General Department of Taxation. Photo: A.N/BNEWS/TTXVN

At the 7th session of the 15th National Assembly, some concerns remain that applying a 5% VAT on fertilizers may reduce production costs for businesses, but they may not pass these savings on to farmers.

Addressing these concerns, Mr. Nguyen Van Phung, former Director of the Large Enterprise Tax Management Department, General Department of Taxation, stated that subjecting fertilizers to a 5% VAT will not only increase revenue from import taxes but also stabilize domestic prices. It also provides farmers the opportunity to demand businesses lower their prices by deducting input VAT.

Dr. Phung Ha, Vice Chairman and General Secretary of the Vietnam Fertilizer Association, mentioned that the association has repeatedly proposed amending Law 71 to shift fertilizers from non-VAT to a 5% VAT category. The association hopes the 8th session of the 15th National Assembly in October will approve the VAT amendment, resolving the 10-year policy bottleneck for the benefit of the state, farmers, and businesses.

There were similar concerns when the National Assembly decided to reduce VAT from 10% to 8% effective from July 2023 to the end of 2023, recently extended to the end of 2024.

In reality, VAT is an indirect tax that businesses collect on behalf of the state from consumers. There is no reason for businesses to increase pre-VAT prices, which they keep, to “pocket” the 2% VAT reduction. If businesses increase prices, they may not sell their products due to higher prices than competitors, as natural competition forces them to match pre-VAT prices. This basis led the government to propose extending the 8% VAT reduction until the end of 2024.