Implementing Selective Checkout Tax (SCT) on beer and alcohol products requires a consolidated strategy.

Implementing Selective Checkout Tax (SCT) on beer and alcohol products requires a consolidated strategy.

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Rising Speculation amongst Policymakers and Industry Insiders: Striking a Balance between State, Brewers, and Public Interests

The Government is gearing up to submit the draft amendment of the Special Consumption Tax (SCT) Law to the National Assembly during this current 9th session of the 15th National Assembly. The objective? To regulate production, influence consumer behavior, and contain detrimental health and environmental products. However, the anticipated changes could heavily impact various industries, notably the alcohol industry, potentially hindering recovery for a sector with a noticeable contribution to Vietnam's GDP.

The Brewing Storm

According to the Ministry of Finance's draft proposal for the revised SCT Law, two primary options are being considered for tax increases:

1. Option One: A progressive annual increase of 5%. This would bring alcohol under 20 degrees up to a top rate of 60%, rising gradually from the current 35%. For stronger alcoholic beverages and beer, the increase would escalate them to a maximum of 90% from the initial 65%.
2. Option Two: A harsher initiation with a 15% increase in the first year, followed by a 5% annual escalation. This would lift alcohol under 20 degrees to an initial 50%, climbing up to 70% by 2030. Higher-alcoholic beverages and beer would start at 80% (an increase from 65%) and soar to a jaw-dropping 100% by 2030.

Though experts agree on the necessity for an increase in SCT, they recognize that the issue transcends health ramifications. It is indeed a matter of balancing competing interests: the State, breweries, and public.

Breweries Brace for Impact

Võ Trí Thành

Over the past years, the beverage industry has faced numerous challenges, including the COVID-19 pandemic, economic volatility, and restrictive policies such as the Law on Prevention and Control of the Harmful Effects of Alcohol and Decree 100/2019/ND-CP on penalizing alcohol-related traffic violations. These hurdles have led to a significant decline in output and revenue for countless businesses in the sector, with some forced to shutter operations or drastically scale back.

Based on data from the General Statistics Office, the beer market—once experiencing an average annual growth rate of nearly 10% from 2009 to 2013—has since witnessed a precipitous drop following the 5% annual SCT increases implemented in 2016. If the proposed SCT escalation kicks off in 2026, the industry could face a devastating impact, instigating a ripple effect among other interconnected industries, and jeopardizing the livelihoods of millions.

The Unintended Consequences of Policy

Higher taxes will inevitably translate into increased product prices. While many studies suggest that beer demand is price-inelastic, with consumers exhibiting minimal sensitivity to price adjustments, income plays a critical role in determining consumption patterns. Thus, it remains undetermined how the various market segments will fare under heightened tax burdens.

In Vietnam, where a significant portion of the populace belongs to the low-income demographic, tax-induced price surges could prompt the turn to smuggled or inadequately regulated products that pose greater health risks. Additionally, affordable, unregulated "grass beer" has persisted in numerous regions, particularly in lower-income areas. This phenomenon has persisted without resolution, posing concerns that the proposed tax hikes could undermine the intended aim of prioritizing public health.

The Macroeconomic Ripple Effects

As a substantial contributor to the national budget, reeling in over VNĐ60 trillion annually (approximately three per cent of total budget revenue), the beer, alcohol, and beverage sector represents a crucial economic pillar. The industry supports millions of jobs, stimulates economic growth, and secures foreign investments.

However, the proposed SCT escalation could have far-reaching consequences that stretch beyond the immediate beer market. A sudden, steep increase in SCT could lead to operational cost increases, decreased competitiveness, and disruptions across a sprawling supply chain, involving industries such as agriculture, transportation, services, tourism, and food and beverage distribution.

A woman shops for beer at a supermarket in Hà Nội. - Photo kinhtedothi.vn

Balancing Interests: Policy Approach

To avoid the unraveling of the burgeoning market, policymakers should opt for a measured, phased approach that strikes a balance among stakeholders' interests. By considering option one in the revised SCT Law proposal—a 5% annual increase capped at 90%—the Government could provide enough leeway for businesses to adapt their strategies while maintaining a gradual yet sustainable growth trajectory for State revenue. Additionally, the Government must proactively combat the proliferation of illicit alcohol products, which pose significant health risks and subvert the intended objectives of the tax increase.

In the long term, the Government could consider implementing a hybrid system that combines the merits of relative and absolute taxes to create a more equitable tax structure and healthier market environment. By calibrating the proportion of relative and absolute taxes and mapping out a clear roadmap to achieving the objectives, policymakers can minimize the negative effects of both tax structures and establish a more efficient and fair taxation system.

1. The proposed amendments to the Special Consumption Tax (SCT) Law, set to be submitted this session, aim to balance state, brewer, and public interests, regulating production and influencing consumer behavior while addressing detrimental health and environmental issues.
2. The Ministry of Finance proposes two options for tax increases: a 5% annual increase (Option One) that would gradually bring alcohol under 20 degrees up to 60% and stronger beverages to 90%, or a 15% increase followed by a 5% annual escalation (Option Two), lifting alcohol under 20 degrees to 50% and rising to 100% for stronger beverages by 2030.
3. Experts acknowledge the necessity for SCT increases but stress that the issue transcends health implications, as it involves balancing competing interests.
4. Over the past years, the beverage industry has faced challenges such as the COVID-19 pandemic, economic volatility, and restrictive policies, leading to a decline in output and revenue for many businesses.
5. The beer market, which once enjoyed an average annual growth rate of nearly 10%, has experienced a precipitous drop following the 5% annual SCT increases in 2016, and the proposed SCT escalation could cause a devastating impact, especially in 2026.
6. Higher taxes could result in increased product prices, with uncertain effects on various market segments given the difference in consumer sensitivity to price adjustments.
7. In a country like Vietnam where a significant portion of the population belongs to the low-income demographic, price surges could drive consumers toward smuggled or inadequately regulated products posing greater health risks.
8. The beer, alcohol, and beverage sector, a crucial economic pillar, contributes over VNĐ60 trillion annually to the national budget and supports millions of jobs, stimulating economic growth, and securing foreign investments.
9. The proposed SCT escalation could have far-reaching consequences, with operational cost increases, decreased competitiveness, and disruptions across a sprawling supply chain in industries such as agriculture, transportation, services, tourism, and food and beverage distribution.
10. To mitigate negative effects, policymakers should consider a measured, phased approach that caps the SCT increase at 90% (Option One) to provide businesses enough adjustment time while fostering sustainable growth.
11. Proactively combating the proliferation of illicit alcohol products is essential to minimize health risks and ensure that the tax increase aims are met.
12. In the long term, a hybrid system combining relative and absolute taxes could offer a more equitable tax structure and healthier market environment, minimizing negative effects while creating a more efficient and fair taxation system.

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