Vietnam proposes extension of VAT reduction to stimulate economic growth

Vietnam initially implemented a 2% VAT reduction, lowering the standard rate from 10% to 8%, as part of its fiscal measures to support economic recovery post-pandemic. This policy, effective from January 1, 2024, was set to expire on June 30, 2025. However, recognizing ongoing economic challenges, the Ministry of Finance has proposed extending this reduction from July 1, 2025, through December 31, 2026.

The proposed extension aims to stimulate domestic consumption, support production and business activities, and contribute to macroeconomic stability. The VAT reduction would continue to apply to goods and services currently subject to the 10% VAT rate, with certain exceptions. Notably, the draft resolution includes new categories eligible for the VAT reduction, such as information technology services, prefabricated metal products, coal at importation and trading stages, coke, refined petroleum, chemical products, and gasoline.

Economic implications and stakeholder perspectives

The proposed extension of the VAT reduction reflects the government’s continued effort to support domestic economic recovery. By lowering the tax burden on goods and services, the policy aims to boost consumption, reduce operational costs for businesses, and enhance market confidence.

Businesses across various sectors have expressed support for the proposed extension, citing the positive impact of the VAT reduction on cost structures and consumer demand. For instance, the retail and manufacturing industries have reported improved sales figures and production outputs since the initial implementation of the tax cut.

Economists view the extension as a timely measure to sustain economic momentum amid global uncertainties. By reducing the tax load, the policy is expected to enhance the competitiveness of Vietnamese goods and services, both locally and in export markets.

A regional perspective on VAT reduction strategies

Vietnam's proposal can be better understood by comparing it with similar fiscal strategies in Southeast Asia. In Thailand, the VAT rate has remained at a reduced 7% - a measure initially introduced to support economic activity post-COVID-19 and still maintained due to its stimulative effects. Thai policymakers credit the policy with keeping inflation low and supporting consumer spending, especially in the retail and tourism sectors.

Indonesia took the opposite approach, raising its VAT rate from 10% to 11% in April 2022. The increase was designed to strengthen fiscal capacity but sparked concerns about its impact on consumer behavior and inflation. Despite these concerns, Indonesia has managed stable growth, illustrating that timing and accompanying policies are crucial when adjusting tax rates.

Malaysia, meanwhile, abolished its goods and services tax (GST) in 2018 and returned to the sales and services tax (SST) - a move aimed at reducing household burdens. While it provided short-term relief, analysts have noted that it also reduced fiscal transparency and revenue efficiency.

Compared to its neighbors, Vietnam’s approach strikes a balance between temporary relief and fiscal discipline. By implementing a targeted and time-bound reduction, it provides businesses and consumers with needed support without undermining the overall tax system. Analysts suggest that a measured approach to VAT adjustments, complemented by long-term reforms in tax administration and investment incentives, may be more effective than abrupt changes.

Furthermore, reducing VAT on production inputs may improve Vietnam’s export competitiveness - especially as global supply chains are reconfiguring and regional competition intensifies. Vietnam’s relatively moderate yet responsive tax adjustment reflects a pragmatic path to balancing growth with sustainability.

Vietnam's proposal to extend the 2% VAT reduction until the end of 2026 underscores the government's commitment to fostering a conducive environment for economic growth. While the policy entails certain fiscal trade-offs, its potential to stimulate consumption, support businesses, and maintain macroeconomic stability presents a compelling case for its adoption. The National Assembly's forthcoming decision will be pivotal in shaping the country's economic trajectory in the coming years.