A Sugary Proposal: The Taxing Question of Sweet Drinks

The proposal to include sugary beverages with a concentration of 5g/100ml or higher under the special consumption tax regime at a rate of 10% has sparked a debate among ministries, experts, scientists, businesses, and consumers.

The Ministry of Health argues that a 10% tax rate is insufficient to change consumption patterns, reduce obesity rates, and curb non-communicable diseases, advocating for a higher tax rate of 40%.

On the other hand, the Ministry of Finance proposes maintaining the 10% tax rate to encourage businesses to produce and import beverages with lower sugar content, raise consumer awareness, and modify consumption behaviors.

According to the Ministry of Finance, “a comprehensive expansion of the tax base requires careful consideration based on convincing evidence and alignment with Vietnam’s conditions.”

A recent study by the Central Institute for Economic Management (CIEM) on the economic impact of imposing the special consumption tax on sugary drinks indicates that while the indirect tax revenue (from the special consumption tax) in the first year (2026) would increase by approximately 8.507 trillion VND, the direct tax revenue would decrease by about 2.152 trillion VND. From the following years (starting 2027), both indirect and direct tax revenues would start to decline at a rate of -0.495%/year, resulting in an estimated loss of 4.978 trillion VND/year.

This would lead to a decrease in value-added, production value, and profits, subsequently reducing the total budget revenue in subsequent cycles. Moreover, the report suggests that implementing this tax policy would not only impact the beverage industry but also have a ripple effect on 25 other sectors in the economy, resulting in a decline of approximately 0.448% in GDP, equivalent to 42.570 trillion VND.

Imposing a higher tax rate (for example, 40%) would have more significant consequences for businesses in the industry and those in the supply chain. As a result, budget revenues would also be affected as VAT and CIT revenues from these businesses would decrease due to reduced consumption of sugary drinks.

Additionally, according to CIEM’s report, businesses in the sugary drink industry have been consecutively hit by shocks related to pandemics and unpredictable fluctuations, weakening their resilience and eroding their competitiveness.

As a result, the recovery and business development of companies in the beverage industry are being negatively impacted not only by socio-economic factors but also by newly issued policies.

For instance, the Land Law 2024, which comes into effect on August 1, 2024, allows for the publication of new land prices closer to market values, applicable from January 1, 2026, and subject to annual adjustments. Experts predict that this new regulation will cause land prices in localities to increase by two to seven times compared to current rates, resulting in a corresponding rise in annual land rental costs for businesses.

The Environmental Protection Law and its guiding documents, including the Law on Responsibility for Recycling, Inventory, and Greenhouse Gas Emission Reduction, along with various environmental fees, will significantly increase compliance and operating costs for businesses in the beverage industry.

The price of sugar, a key input for the beverage industry, has risen due to the increase in VAT on sugar from 5% to 10%…

With production and operating costs rising due to policy changes mentioned above, beverage companies will have no choice but to increase their product prices to maintain revenue and cost balance. This could contribute to inflationary pressures as beverages are included in the basket of goods and services used to calculate the CPI.

Facing increased production and operating costs and declining consumer demand, beverage manufacturers, particularly small and medium-sized enterprises, that are already in a weakened state, will suffer more significant losses compared to other industries.

Therefore, CIEM’s report recommends refraining from imposing the special consumption tax on sugary drinks. Additionally, the report suggests that the government should focus on supporting businesses’ recovery during this phase and work on amending and supplementing legislation to facilitate businesses instead of issuing regulations that may negatively impact their operations.