May 03, 2014
Since this tax is to be levied on non-alcoholic carbonated soft drinks (including fizzy drinks for dieters), non-alcoholic non-carbonated soft drinks will not be affected.
Why has such tax been proposed for bottled carbonated soft drinks? What is behind unveils a little-known story on the beverage market.
Everyone knows how enticing Vietnam’s beverage market is. According to the date available from tax agencies, the total consumption of non-alcoholic carbonated drinks was 925 million leters in 2013, of which the lion’s share of 88% is clinched by foreign players, primarily Coca-Cola and Pepsi.
Now 134 beverage makers, both domestic and foreign, are operating in Vietnam. Still, among them are only a handful of local enterprises producing non-alcoholic carbonated products. Vietnamese players (excluding those producing beer and alcohol) are mainly active in the non-carbonated beverage segment, with products such as tea, coffee, soy milk and soft drinks. Recently, Pepsi has launched its Oolong tea product, which has become the biggest rival to Zero Degree Green Tea produced by THP Group. This may have come as an alarm for domestic beverage producers who have been long quite content with operating in the non-carbonated segment as it seems to them that a complete domination of foreign enterprises is down the line.
In mid-2013, Vietnam Beer, Alcohol and Beverage Association (VBA) proposed an excise tax on non-alcoholic carbonated soft drinks. The reason given was that this tax had been applied in many countries in order to increase State budget revenue and minimize consumers’ consumption of carbonated drinks, which might be a cause of obesity, stomach ulcers and other digestive disorders.
Foreign businesses reacted immediately. At a workshop on food and beverage industries held in Hanoi early this month, Mark Gillin, chairman of the American Chamber of Commerce in Vietnam (AmCham), said such proposal was based on ambiguous scientific evidence and unsound motive.
Gillin argued that the ultimate goal of the proposal was to decrease that demand for carbonated drinks of famous foreign brands and lift the demand for non-carbonated drinks of domestic brands. If the Vietnamese Government levied a tax that was beneficial for local beverage brands and detrimental to their foreign counterparts, Gillin believed it would be a clear violation of WTO commitments and imply that Vietnam was setting up more unreasonable barriers against foreign investors.
Possible scenarios
Whereas AmCham has raised its strong voice of opposition, management agencies have not given any comment, although the Ministry of Finance intends to forward the draft to the Government and the National Assembly during the May sitting. Many people have thought about the possible scenarios if this tax is imposed. Two main possibilities are the most likely: prices of carbonated soft drinks would increase or producers would sacrifice their profits to keep prices unchanged to protect their market share.
Regarding the first possibility, Dr. Tran Kim Chung, vice rector of the Central Institute for Economic Management, and his colleagues presented a survey at the workshop last week mentioned above. According to Chung, when carbonated soft drinks marked up 1%, demand would fall 2.8%, meaning a 10% price hike might lead to a drop of 28% in demand. “One study shows that this tax on carbonated soft drinks may impact the six major cities by weakening the purchasing power for such products, thereby dragging down production,” he said. Assuming the rate of 10% was calculated in accordance with factory prices, this excise tax on carbonated drinks would cost the beverage industry US$40.5 million and the economy US$12.1 million, he added.
“The increase in State budget revenue when this tax is levied could be VND396.541 billion. The loss of value-added tax could be VND85.175 billion, and the loss of corporate income tax could be VND77.105 billion. The government revenue after deduction of losses should be VND234.264 billion. Production of beverages in Vietnam would fall 0.58% and gross domestic product (GDP) might drop 0.01%,” said Chung.
But a question should be posed: when prices of carbonated soft drinks rise, would consumers shift from (taxable) carbonated soft drinks of foreign brands non-carbonated drinks produced by domestic firms? Many experts and entrepreneurs at the workshop said there had been no evidence in any other markets suggesting that this would be the case.
Furthermore, if the draft law is passed, then carbonated drinks will join the group of luxuries such as beer, cars, yachts, golf or massage, which are subject to an excise obligation. However, the main customers of carbonated soft drinks in Vietnam are middle-income earners, while the high-income ones rarely consume such drinks.
Regarding the second possibility, meaning beverage makers (primarily Coca-Cola and Pepsi) would not increase prices to keep their market share, this would not necessarily make the competition easier for domestic players. Moreover, foreign giants could always boost investment in non-carbonated drinks, exerting more competitive pressure on domestic producers who are doing business this market segment.
Lawmakers had better arrive at an adequate answer before deciding on the policy change.
(By Hong Phuc)