Points to note for companies when value added tax (VAT) increases from 10% to 8%
2023/09/23
1. Industries eligible for VAT reduction
The VAT reduction will be applied to goods and services that are currently eligible for a tax reduction from 10% to 8%, but the following three groups will not be eligible:
VAT reductions for each type of product or service are uniformly applied at each stage of import, production, processing, and commercial operations. If the goods and services listed in appendices I, II, and III (attached to the decree) are not subject to VAT or are subject to 5% VAT under the Value Added Tax Law, the VAT reduction will not be applied and comply with regulations.
2. Points to note when applying VAT reduction
The VAT reduction was also implemented from February 1 to December 31, 2022, but several problems arose during the implementation process, causing many difficulties for businesses. Therefore, when applying the VAT reduction, it is necessary to pay attention to the following points.
2.1. Determination of purchased or sold goods and services eligible for VAT reduction
To determine whether a product or service is eligible for VAT reduction, we recommend the following steps:
[Step 1]
Referring to Article 1, Paragraph 1 of Decree No.44/2023/ND-CP (hereinafter called “Decree 44”), check whether the business field and product/service group of the company or supplier falls under the groups listed in a), b), and c) above.
・If it is applicable, continue with [step 2] below.
・If it is not applicable, the product/service will be eligible for VAT reduction.
[Step 2]
Check with appendices I, II and III (List of exemptions from VAT reduction) of Decree 44 by following the steps below.
・Check the business code in columns (4) to (7) for the service.
・For import, production, processing, and commercial activities, the following process need to be done.
-Check boxes (8) and (9) for production, processing, and commercial activities.
-Check the HS code for import activities (column (10) in appendices I and III).
Companies can enter their company name or tax code on the business portal and search for business codes and activity details. The business code on the business portal is a 4-digit business code, and details of the business can be confirmed in Decree No.27/2018/QD-TTg.
Looking at the actual application status, it can be seen that it is difficult for companies to determine whether their products and services are on the list exempt from VAT reduction. This is because the production and business activities of companies are diverse and complex, and laws and regulations do not provide detailed guidance on the individual cases of each company. If you are unsure whether or not your tax is applicable, we recommend that you submit an official letter to the competent tax authority for detailed guidance.
2.2. Points to note when applying VAT reduction
The applicable period of the VAT reduction will be from July 1, 2023 to December 31, 2023. Decree 44 does not specify in detail the timing of issuance of an invoice for the application of VAT reduction. Regarding this matter, by the end of July 2023, no new instructions have been issued through an official letter from the Ministry of Finance. Therefore, based on the official letter No.2688/BTC-TCT published in March 23, 2022, companies need to pay attention to the following cases.
- ・Case 1: The office had formed a service provision contract to collect the amount before or during the provision of the service, and had created an invoice with a VAT rate of 10% at the time of collection before July 1, 2023. However, if services are completed between July 1st and December 31st 2023, the invoice amounts created before July 1st will not be eligible for VAT reduction. In accordance with the regulations, the remaining amounts for which invoices are generated between July 1st and December 31, 2023, are eligible for VAT reduction.
- ・Case 2: The office provided goods and services eligible for 10% VAT before July 1st 2023, but invoices for revenue from sales of goods and services that occurred before July 1 were submitted in July. In this case, it will be considered as an error in the timing of invoice creation, and the office will not be able to apply the VAT reduction.
- ・Case 3: As for 10% VAT invoices created before July 1st 2023, if adjustments or returns occur on the amount, VAT rate, or VAT amount after July 1st, adjustment invoices or returns invoices will be accepted and will be created with VAT at 10%.
- ・Case 4: As for activities that provide certain goods and services, such as electricity supply, the offices can apply the VAT reduction on invoices created between July 1st and December 31st, 2023.
3. Potential risks when companies which adopt the deduction method for VAT calculation apply the wrong VAT rate
In practice, if a company incorrectly determines the VAT rate for goods or services, the seller issues an invoice with the incorrect VAT rate, it would be possible that both the seller and the buyer submit incorrect VAT application or VAT refund documents. In order to avoid those risks, please check the following two cases.
3.1. Goods/services are subject to 8% VAT, but the seller issues an invoice with 10% VAT
- ・Risk to seller:
Since the seller pays VAT at the tax rate stated on the invoice (a higher tax rate than the regulation), there is no risk of additional taxation, but there is an administrative fine stipulated in Article 12 of Decree No.125/2020/ND-CP. According to the decree, if a company submit incorrect documents or appendix, as long as it is not related to the determination of taxation, a fine of VND1,500,000~2,500,000 will be imposed. - ・Risk to buyer:
According to Notification 5 of Article 12 of Circular No.219/2013/TT-BTC on VAT, if the seller declares and pays tax at the rate stated on the invoice, the buyer can deduct the input VAT amount (2% difference) at the rate stated on the invoice. However, confirmation from the seller’s competent tax authority is required. Companies eligible for VAT refunds are subject to the following risks:
-Regarding purchase invoices to which an incorrect VAT rate was applied, the VAT amount equivalent to the 2% difference will not be refunded.
-If you make an incorrect declaration but the refund amount on the VAT refund document does not increase, you will be subject to a fine of VND5,000,000~8,000,000 or a 20% penalty for the refund amount which exceeded the stipulated amount.
3.2. Goods/services are subject to 10% VAT, but the seller issues an invoice with 8% VAT
According to decree, sellers are required to declare and pay VAT at a rate of 10%, which poses the following risks:
-Tax collection for the shortfall in VAT amount
-20% penalty for shortfall
-Late payment interest (0.03% x number of days in arrears x shortfall)
-Regarding deduction and declaration of input VAT, the buyer can only deduct input VAT amount at the tax rate stated on the invoice.
-VAT refundable companies will only be refunded the VAT amount at the rate stated on the invoice. In addition, if the tax refund amount on the VAT refund document does not increase even though the tax return is incorrect, a fine of VND5,000,000~8,000,000 VND will be imposed.
As mentioned above, companies need to accurately determine the VAT rate applicable to the goods and services they sell. In order to minimize the future risks, we recommend checking the input VAT rate on the supplier’s VAT invoice.
Conclusion
The application of the VAT tax reduction will have the effect of bringing significant economic benefits to companies as they recover and develop their production and business activities following the economic stagnation caused by the COVID-19. However, please be careful to apply appropriate tax rates to avoid arising risks for companies, business partners, suppliers, etc.
References:
・Decree No. 44/2023/ND-CP
・Decree No. 15/2022/ND-CP
・Decree No. 123/2020/ND-CP
・Decree No. 125/2020/ND-CP
・Circular No. 219/2013/TT-BTC
・Official letter No. 2688/BTC-TCT dated March 23, 2022
・Official letter No. 1647/TCT-CS dated May 10, 2023
*This article was translated by Yarakuzen.
