Tax relief package not enough to revive firms

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Workers at a factory of garment exporter Anh Khoa in Ho Chi Minh City. The government will seek the National Assembly's approval for a 30 percent cut in the 2012 corporate income tax for small and medium companies and labor-intensive businesses.

The latest tax relief package of VND29 trillion (US$1.4 billion) announced by the government is misdirected and comes too late to be effective, critics say.

They say that the provision of tax reductions and extensions to help businesses and support financial markets is not a timely measure and is not likely to help firms that need it most.

The government will seek the National Assembly's approval for a 30 percent cut in the 2012 corporate income tax for small and medium companies and labor-intensive businesses, said Vu Duc Dam, chairman of the government office.

He said businesses will also be allowed to delay value-added tax payments for April, May and June by six months, with the total taxes saved amounting to VND12.3 trillion. Companies can also save VND3.5 trillion from the deferment in paying corporate income tax.

Also included in the relief package is a 50 percent reduction in the cost of land leases for some businesses, including those in tourism, textiles and services sectors.

Cao Sy Kiem, chairman of the Vietnam Association of Small- and Medium-Sized Enterprises, said: "The policy could partly support firms, as they are now struggling to survive amidst higher input costs and lower purchasing power."

Nearly 18,000 companies shut down or suspended operations in the first four months of the year, up 9.5 percent over the same period last year, according to the Ministry of Planning and Investment. Of these, firms based in Ho Chi Minh City number more than 5,800, while the figure is over 3,500 for Hanoi.

Most of these companies operated in construction, manufacturing and processing, and real estate sectors.

Kiem said the package is not enough to rescue firms that are already in deep trouble. It benefits only firms with good business operations that are making profits, he said.

Most of the weak companies, which should have received support from the government, will not enjoy any benefit from the policy because they have no profits to pay taxes, he explained.

The launching of the tax relief package is also too late, Kiem said. "We have spent a long time considering measures to rescue firms. The policy has been introduced only after many firms have become too weak."

Moreover, one of the biggest difficulties facing businesses is low purchasing power, he said.

Economist Le Dang Doanh said the government should cut value-added tax and corporate income tax, which now are higher than those of other Southeast Asian countries, to help local products more competitive.

Some Southeast Asian countries like Thailand and Malaysia impose value-added tax of 5-7 percent, while the VAT rate is 10 percent in Vietnam. Meanwhile, the average corporate income tax in ASEAN countries is 17 percent, compared to 25 percent in Vietnam.

"As for the VAT deadline extension, I think it'd be better to exempt or cut this tax," Doanh said. "If it is reduced, consumers will be happy to buy goods at lower prices, and consequently businesses can sell more products."

"We should apply many policies to assist businesses and the market, while also boosting consumption to ease the burdens of the manufacturing sector," he said.

Tran Thi Hong, director of an electric appliance firm in Hanoi, said the policy will do nothing for her firm, because it now does not have profits to pay tax.

"What businesses really need is accessibility to bank loans at lower interest rates. We should do something to prevent banks from rejecting loan applications with various excuses," she said.

Inflation worries

Some economists have expressed concern that the new rescue package would cause inflation to speed up. Inflation slowed in April, according to the General Statistics Office. It climbed 10.54 percent from a year earlier. March inflation was 14.15 percent.

However, Dam of the government office said: "The government is managing the economy in a very active manner with supportive measures, and there is no stimulus package that can fuel inflation."

Deputy Finance Minister Vu Thi Mai said while the tax concessions are valued at VND29 trillion, they will end up costing the government budget just VND9 trillion, because much of the full figure includes payment extensions.

Many economists have said the most important is not the size of tax revenues, but suitable collection and spending. While firms are facing many difficulties, the government is seeking approval from the National Assembly to use more bond proceeds for funding public projects not included in the original priority list submitted to the legislative body.

The move raised concerns about the overspending as it comes at a time the government is trying to cut public spending.

Spur spending

Kiem said what firms need most is lower interest rates that can help them boost production. "It is very good to have the interest rate reduced to 15 percent. However, it needs to be cut further."

The central bank imposed a 15 percent cap on lending interest rates for four preferential sectors, starting May 8. Beneficiaries of the lowered rates include businesses operating in the supporting industry, export and agriculture sectors, and small- and medium-sized enterprises.

According to a report of the Vietnam Chamber of Commerce and Industry, more than half the firms accessed loans at interest rates of over 18 percent in April, while the suitable rate for most firms is 13-14 percent.

Economist Doanh said the government should study to help firms deal with the big stockpiles of goods. It should also take measures to spur consumption in the time of low demand.

According to a recent Nielsen survey, Vietnam's consumer confidence fell to its lowest level in the first quarter since mid 2010.

According to Nielsen, the consumer confidence index for Vietnam dipped five points versus the previous quarter to stand at 94 points in the first quarter as consumers remain concerned about the economic situation. The survey also revealed that three out of every four Vietnamese online consumers believe it is not a good time to buy the things they want and need over the next 12 months.

Van Duc Muoi, general director of food company Vissan, said the government should have a policy allowing firms to access new loans with low interest rates to repay their mature debts. "This could help firms sustain production and cut production costs, which, in turn, would help lower retail prices and encourage local consumption."

Economist Nguyen Mai said consumers with biggest purchasing power are those with medium income upwards. They have to pay personal income tax.

The government should consider exempting personal income tax for them to increase their real income, which would spur consumption, he said.

Another economist said the government should come up with long-term measures to help firms instead of short-term relief packages.

"To revive enterprises, the most important thing is to effectively restructure them and settle problems in the banking system," he said.

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