An employee weighs gold rings at a jeweler's in Hanoi. Vietnam's central bank said last week that the government should consider levying a special consumption tax on gold. Photo: Reuters
Experts say the central bank's plan to impose a luxury tax on gold will not stop the public from hoarding the precious metal.
They warn that such a move could in fact bring even more chaos to a market already fraught with dodgy practices and policy uncertainties.
The State Bank of Vietnam said last week that even though the government will not ban gold holdings, it is necessary to restrict the presence of the metal to support the local currency.
Since gold is not a product that the government encourages to be traded widely, it should consider levying a special consumption tax on the metal, the central bank said. The bank also suggested a capital gains tax on any profit from the sale of gold.
The monetary authority did not propose a specific tax rate, saying that other agencies will come up with a proper number later if the suggestion is approved by the government.
Vietnam began to tighten control of the gold market in 2010 with the closure of around 20 gold trading floors.
Last August, the central bank officially took over the production of gold bullion, appointing Saigon Jewelry Company as the country's only producer. The firm, whose SJC-branded bullion already accounted for 90 percent of the local market, now only casts gold bars based on orders from the central bank.
According to the central bank, its efforts have paid off, allowing local lenders to buy 60 tons of gold since April.
Vu Duc Dam, chairman of the government's office, told the press on Sunday that keeping gold savings was an old tradition in Vietnam that was not helping the economy. There have to be measures to attract and make full use of these assets, he said.
Dam said gold prices used to put downward pressure on the dong, but now the exchange rate between the dong and the US dollar has been stabilized.
Gold fell 5 percent in Vietnam in October, ending the month at VND46.13 million per 37.5-gram tael.
The central bank has kept the reference rate for the dong stable at 20,828 against the dollar since late last year.
Nguyen Hoang Hai, general secretary of the Vietnam Association of Financial Investors, a group of 63 institutions including banks, insurance companies and funds, said the new taxes would be well in line with the government's efforts so far to reduce the dominance of gold on the domestic market and strengthen the dong.
A high tax rate will push local prices above international prices and many people will no longer buy and sell gold, he said.
But many other experts are not so sure about the new plan.
Former central bank governor Cao Sy Kiem said luxury taxes are usually very high. That means gold prices will increase sharply if the tax is introduced, he said.
The central bank has its reasons to discourage people from keeping gold, but officials have to think carefully about how to do it, he said.
The public prefer gold because they want to protect the value of their savings when inflation is high and the local currency is weak. Making the metal more expensive will undermine that purpose, he said.
"The central bank should consider other options for restricting gold. There's no need to impose a luxury tax on gold like alcohol, cars and tobacco," said Kiem.
A senior official from the General Department of Taxation said tax officials have never thought about a special consumption tax on gold, which is already subject to a 10 percent value-added tax.
This luxury tax should be brought into place only when the government wants to keep tight reins on a certain product, he said.
The question is whether gold should be treated as a luxury product, he said.
Nguyen Thanh Long, chairman of the Vietnam Gold Trade Association, believes the answer is no.
Existing regulations do not list gold among restricted products, so it should not face a luxury tax, he said.
"A value-added tax has already been added to the prices of gold bars and jewelry. If there is a new tax, it means gold is taxed twice," Long said.
Since most of the gold in the country has been privately held for years, it would not be fair to impose a tax on this amount now, he added.
Tran Thanh Hai, general director of Vietnam Gold Business, a Ho Chi Minh City-based gold trading company, said luxury taxes on alcohol and tobacco products now range from 10 percent to 65 percent.
If the lowest rate of 10 percent is applied for gold, the gap between local and global gold prices will expand to up to US$220 per tael.
"I just can't imagine what will happen to the gold market when the proposed tax policies come into effect," he said. "We have seen high taxes lead to problems like black markets and collusion between law enforcement officers and smugglers."
Industry insiders said the market has already had enough setbacks recently, including an increasing amount of fake or low-quality gold and the establishment of a government-imposed monopoly that sent many people rushing to sell gold bars that were not produced by Saigon Jewelry Company for fear of losses.
Uncertainty has hung low and thick over the market this year.
The State Bank of Vietnam had earlier ordered banks to stop raising physical gold deposits starting November 25. But now, to avoid forcing banks to repay a large amount of gold to depositors and putting pressure on liquidity, the deadline has been extended to mid 2013.
While the central bank has strengthened regulations in an attempt to eliminate small gold shops, its plan to set up an authorized gold trading system has yet to be implemented.
The central bank also said last week that it is not its job to keep gold prices stable.
"The gold market is unstable now and a new tax will just create even more difficulties and put businesses in a crisis," said Nguyen Van Dung, chairman of the HCMC Jewelry Association.
"Jewelry sales will slow while things will get even more complicated in the bullion market amid the monopoly. I'm worried most about more than 20,000 employees at our gold companies," he said.
"We will file a petition if the luxury tax is approved," said Dung.
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