How does the car tax affect the demand for cars in the vietnamese market

Untitled Ministry of Education and Training Faculty of Foreign Language UEH University MICROECONOMIC GROUP ESSAY TOPIC HOW DOES THE AUTOMOBILE TAX AFFECT THE DEMAND FOR CARS IN THE VIETNAMESE MARKET L[.]

Ministry of Education and Training

Faculty of Foreign Language UEH University

MICROECONOMIC

GROUP ESSAY

TOPIC : HOW DOES THE AUTOMOBILE TAX AFFECT THE DEMAND FOR CARS IN THE VIETNAMESE MARKET

LECTURER Nguyễn Thanh Triều

STUDENT’S GROUP Group 4

MEMBER Trương Thị Thảo Nghi

Trần Minh Hiển

Nguyễn Ngọc Thảo Vy

Nguyễn Phương Thảo

Lê Hứa Thùy Dương

Bùi Thị Minh Yến

TABLE OF CONTENTS

A INTRODUCTION 3

1 Reason for choosing the topic 3

2 Research object and research scope 3

3 Objectives of the research 3

B DETAILED CONTENT 3

Chapter 1 Theoretical basis 4

1.1 Demand for cars in Vietnam 4

1.2 Vietnam’s taxes on car 5

1.3 How does the government impact auto taxes on the market? Why? 6

1.4 Reduced tax through ASEAN FTAs 7

- Rapidly growing auto market 7

Chapter 2 Current status of automobile tax in Vietnam 7

2.1 Why the goverment have to taxed cars? 7

2.1.1 The infrastructure 8

2.1.2 Limit trade deficit 8

2.1.3 Many cars increase emission 8

2.2 How the goverment taxed cars 9

2.2.1 Automoblie tax in the past and the consumer's tax-driven demand 9

2.2.2 Car tax at the moment 10

- Import tax 10

- Special consumption tax 11

- Value added tax (VAT) 11

2.3 The impact of the current car tax on people's demand for cars 12

Chapter 3 Consequences of automobile tax on consumption demand in the market and proposed solutions 14 1.1. Consequences of automonile tax on comsumption demand in the

market 14

A CONCLUSION 15 REFERENCES 15

A INTRODUCTION

Vietnam has secured its spot among the countries with the most expensive cars due

to the exorbitant taxes imposed by the government on every vehicle As a result, the cost of purchasing a car often skyrockets to two or three times its original price, causing significant financial strain As per Vietnam's Ministry of Planning and Investment (MPI), car prices within the country are exorbitant, reaching two to three times the cost in Thailand and Indonesia The disparity is even more significant in comparison to that of the US and Japan The primary culprits behind this discrepancy are the steep taxes and fees imposed on the purchase of automobiles One theory suggests that Vietnam's high taxes and fees on cars have been implemented to limit their quantity, resulting in inflated costs However, in comparison to neighboring nations, such as Thailand or Indonesia, their country's transportation system is not as good as Vietnam, yet their citizens continue to purchase cars at extremely low prices; even brand-new cars are less expensive than the same-old cars of the same type in the same category inside Vietnam For instance, a Ford Fiesta Sedan is offered for about

300 million, but it will cost at least 600 million in Vietnam

1 Reason for choosing the topic

We selected the essay topic "The impact of automobile tax on the Vietnamese market economy" after practicing the identified issues in order to resolve the issues raised by Vietnam's high taxation of automobiles in comparison to other nations and to give a general overview of automobile taxes in the current Vietnamese economy

2 Research object and research scope

Our group chose to focus on car taxation in Vietnam as part of our research topic on the Vietnamese market Despite notable growth in the passenger vehicle industry, Vietnam still levies heavy taxes on automobile purchases The objective of such regulation is to protect the passenger vehicle market while also curbing pollution and congestion The complex tax structure in Vietnam includes three types of taxes and five separate fees that must be paid by customers looking to purchase a passenger vehicle, significantly increasing the cost Car owners must also pay around ten additional fees to legally operate their vehicles, including fees for registration, license plates, safety certification, fuel consumption testing, and environmental

assessments Therefore, it is extremely necessary to set out car tax effects on businesses

3 Objectives of the Research

Evaluate the influence of high taxes on Vietnam's car market and explain the above reason Analysis of automotive tax policies in Vietnam and giving a specific theoretical basis

B DETAILED CONTENT

Chapter 1 Theoretical basis

After many years of slow growth and stagnation, the last couple of years have seen asignificant boom in car sales in Vietnam Having been known for its staggering usage ofmotorbikes, Vietnam now appears to be rapidly heading for the age of the automobile As mentioned above, Vietnam has a large portion of its population using motorbikes asmeans of transportation However, according to a survey by GlobalWebIndex on behalfof Ford Motor, about 54% of the participants told that they used their personal carsregularly (once a week), compare with 50% using motorbikes The survey also showedvarious other means of transportation that Vietnamese people use

Figure 1: Vietnamese traffic as a whole

The price of domestic cars has soared since the beginning of 2016 due to theGovernment's adjustment of special consumption taxes on imported automobiles

As aresult, many car dealers increase the price of cars to the public, effectively lower thedemand When the Government imposes tax on cars, (for example, cars having 2.5L 3.0L cylinder will be imposed tax from 50% to 55%; 3.0L 4.0L: 90%, 4.0L -5.0L:110% and 5.0L - 6.0L: 130%; 6.0L and above: 150%) the price is increased, while thequantity demanded falls, represented by the movement of the demand curve Tax did notshift the demand curve, because it increases the price and lower the demand Therefore, itis not entirely the factor that creates the automobile boom in Vietnam The main reasonfor the boom is economic growth and stability After some years of slower economicgrowth, the Vietnamese economy is looking stronger again, and Vietnam’s income percapita is reaching a stage where increasing car ownership is

to be expected This providespeople with the confidence to make the significant investment for a car Other factors thatmake cars a more desirable option are improvements in infrastructure traffic and airbecoming worse due to pollution in cities (making the car a safer and ‘healthier’ option) and, importantly, the increasing social normalization of car ownership Having a car is amust-have in the middle-class, and it represents the social status and a central position ofthe owners

1.2 Vietnam’s taxes on car

Ignoring the speculation that the price of car is to be reduced in 2018 (due to taxdeclination), the national car market keeps on growing as a whole, not leaving onlypersonal cars Vietnam Automobile Manufacturers’ Association (VAMA) reported thattheir sales of cars after the first 6 months of 2015 are 103.542 units, 57,24% more than inthe same period in 2015 Specifically, passenger cars sales increase by 45%, commercialcars 75% and SUVs 136% Likewise, Vietnamese consumers purchased 214,000 cars inthe first nine months of 2016 - a year-on-year leap of 31% The graph below representsthe car purchases from 2013 to 2014, and the first 6 months of 2015 Although the figuresfluctuated over the years, it highlighted the growth in 2015 The main reason for thegrowth is the deduction of registration fee (15% to 10%), import duty (70%) for membersof WTO and 50% for ASEANs

Despite that, the price of domestic cars has soared since the beginning of 2016 due to the Government's adjustment of special consumption taxes on imported automobiles

As aresult, many car dealers increase the price of cars to the public, effectively lower thedemand When the Government imposes tax on cars, (for example, cars having 2.5L 3.0L cylinder will be imposed tax from 50% to 55%; 3.0L 4.0L: 90%, 4.0L -5.0L:110% and 5.0L - 6.0L: 130%; 6.0L and above: 150%) the price is increased, while thequantity demanded falls, represented by the movement of the demand curve Tax did notshift the demand curve, because it increases the price and lower the demand Therefore, itis not entirely the factor that creates the automobile boom in

Vietnam The main reasonfor the boom is economic growth and stability After some years of slower economicgrowth, the Vietnamese economy is looking stronger again, and Vietnam’s income percapita is reaching a stage where increasing car ownership is

to be expected This providespeople with the confidence to make the significant investment for a car Other factors thatmake cars a more desirable option are improvements in infrastructure traffic and airbecoming worse due to pollution in cities (making the car a safer and ‘healthier’ option)and, importantly, the increasing social normalization of car ownership Having a car is amust-have in the middle-class, and it represents the social status and a central position ofthe owners

Figure 2 Car purchased 2013-2014 and 6 months of 2015 Other types of cars such as a truck or van with over ten seats, electric car or bio-energy cars are charged lower Special Consumption tax, ranging between 10 and 30% of the original amount you would pay In addition, if the car is fully imported from other countries, it also has to pay Importation tax

For cars containing engine with cylinder capacity less than 2.5l, the importation tax is 82% and for cars containing engine with cylinder capacity above 3l, it is 72 – 77% the original price of the cars When the car is registered, it is further charged registration tax and some other additional fees The registration tax is also different from cars to cars, but mostly from 10 to 15% the original price of the car for civil car under 10 seats

1.3 How does the government impact auto taxes on the market? Why?

Vietnam is still imposing high taxes and fees in the country's automotive market despite of strong growth in the passenger vehicle market To purchase a passenger vehicle, Vietnamese customers must pay three type of taxes and five different fees leading to a price hike in passenger vehicles in Vietnam when compared to neighboring countries such as Thailand and Indonesia As import tariffs drop and congestion rises, further taxes and fees might be considered as a means to generate revenue and limit the number of cars on the road

Car owners will have to pay about 10 kinds of fees to put their cars into circulation, These include the ownership registration fee (10-15%), number plate granting fee, vehicle registration fee (VND 240,000-560,000), technical safety assurance certification fee (VND 50,000-100,000), fuel consumption testing fee, emission testing fee, energy labeling certification fee, and others

Since July 2016, a special consumption tax has been enforced for vehicles with engines below 2.0l by lowering the consumption tax from 45% to 40% Meanwhile, larger vehicles are given higher costs as tax is increased to 55- 150% solely to accommodate the big engine size Low consumption tax will drive sales of affordable small vehicles in the middle-class segment of 1,0l - 2,0l The tax adjustments are aimed at promoting the use of small passenger vehicles, as those with small engine capacity have lower fuel consumption in an effort to lessen the impact on CO2 emissions

- Rapidly growing auto market

According to the Vietnam Automobile Manufacturers Association, Vietnam's total automobile sales expanded 21% on-year to 154,273 units in the first half of 2019 There are around 27,520 automobiles were sold in the Vietnamese market in June

alone, increasing 0,1% from the previous month and 19% from the same month last year

To meet the increasing demand, between January and June 2019, the country approximately spent US$ 3.7 billion to import completely-built automobiles and components for assembly, seeing a year-on-year surge of 7.9% Specifically, Vietnam imported 77,795 completely-built automobiles worth over US$ 1.7 billion, 532.4% and 424.8% increase in volume and value respectively, according to the Ministry of Industry and Trade

Chapter 2 Current status of automobile tax in Vietnam

B.1 Why the goverment have to taxed cars?

The price of cars is high in Vietnam because of the environmental pollution situation, which is subject to many taxes and fees While other countries like Thailand or Indonesia have a less developed transport infrastructure than Vietnam, their people still buy automobiles at very low prices, even their newer models are cheaper than Vietnam's old models of the same type

The majority of automotive enterprises in Vietnam import domestic components and assemblies, including Thaco and Toyota Vietnam, but the price is still high The question "when will the Vietnamese have cheap cars" will remain unanswered, regardless of whether the Vietnamese automobile industry has yet to find a new path, cars are subject to many taxes, and transport infrastructure has not been improved The outrageously high tax rate that the Vietnamese government charges per car makes Vietnam one of the most expensive countries for cars As a result of those taxes, the cost of purchasing a car often increases by a significant sum, sometimes twice or three times the original price In some cases, cars can be taxed too much, which can lead to a decline in domestic car consumption; others argue that owning a car can improve a country's standard of living and help its people live more comfortably What is the reason for the government's high taxation of cars?

B.1.1 The infrastructure

Due to inadequate infrastructure, in large and densely populated cities and centers, traffic jams and traffic jams become common Most people in Vietnam use motorbikes

as the main means of transportation, assuming that the more people use cars, the more serious the traffic congestion will be, so the tax on cars is to reduce the amount of people's consumption on this item, to avoid causing more traffic jams

B.1.2 Limit trade deficit

With the automobile industry of Vietnam, there is almost nothing but assembly and processing of car shells This means that most of Vietnam's cars are currently imported not only for complete units but also for machinery and components Importing a lot means trade surplus and inflation, with the economic context of our country lacking capital, it is not good at all Therefore, it is absolutely right to have to tax and charge high fees to limit

B.1.3 Many cars increase emission

More cars mean more emissions, more congested traffic, and more time on the road More cars mean increased parking costs In the future, with more cars, the cost of car maintenance will be higher, maybe one and a half times Not to mention traffic jams will cause a part of people to keep their cars at home and ride motorbikes or public transport for convenience The end result will again be an increase in the number of car users, but a decrease in user satisfaction

Of course, these are just a few of the many reasons why the government has to adjust taxes so high Everything has two sides, high taxes can be detrimental in increasing consumption but it also has certain benefits

B.2.1 Automoblie tax in the past and the consumer's tax-driven

demand

In 2003, import tax rates and registration fees were changed On May 12, 2003, Decree

47 of the Government on registration fee was issued, according to this decree, cars with 7 seats or less and motorbikes of organizations and individuals in provinces and cities The first registration fee is 5% The decision then pushed the cost of buying a car up by 5-8% compared to before

In 2004, the excise tax on cars increased from 5% to 24%, with this tax, the retail price

of cars will increase by 35% and by the end of that year, the car market will enter the first "hot" period First, many models at that time were "sold out" But by the beginning of 2004, the "hot fever" market turned to "cold fever" and car sales fell sharply Also starting in 2004, CBU cars are allowed to be imported into Vietnam with

a rather high import tax rate, up to 100%

Entering 2005, the excise tax on cars with less than 5 seats will increase to 40%, so, like the previous year, by the fourth quarter of 2004, car prices have skyrocketed However, because the tax has increased, the auto market has returned to a state of

"cold fever", no one buys cars for sale Only by the end of 2005, when the excise tax

on cars was about to increase to 50% for cars with less than 5 seats and 30% for cars with 6 to 16 seats, resale sales increased by 20-30% compared to the beginning of the year

In 2006, the price of cars at this time has increased, models with less than 5 seats cost more than 3,000-5,000 USD Also starting from 6/2006, used cars are allowed to be imported into Vietnam, but they are subject to a high absolute tax rate of 458-600% And also in this year, the import tax rate for new and complete cars also decreased from 100% to 90%

In 2007, in order to put pressure on domestic automobile enterprises to reduce car prices, the Ministry of Finance conducted 3 tax reductions New CBU is reduced import tax from 90% to 80% In August 2007, it was further reduced to 70% and on November 16, 2007, the tax rate for complete new cars was 60% This policy has caused a great response to domestic automobile enterprises

In 2008, the Ministry of Finance decided to increase the import tax on automobiles from 60% to 70% Next, the tax was raised to 83%, leading to an increase in the price

of imported cars Some agile businesses have imported a large number of cars, hoarding and waiting for the tax to increase is to sell high-priced cars to make a profit

As a result, domestic car prices were also pushed up Consumers rush to buy making the auto market unstable Since the end of August 2008, the global economic recession combined with high prices has caused car manufacturers' sales volume in the last 4 months of the year to drop by more than half As a result, many businesses had to suspend production and workers lost their jobs

From the beginning of 2009, Hanoi changed again, decided to impose a new registration fee of 12% for cars from January 19, 2009, and from April 1, 2009, the new excise tax took effect The auto market is vibrant right now Customers flocked to buy tax cars However, only one month later, at the beginning of May 2009, due to economic difficulties, the Government decided to reduce 50% of registration fees and 50% of VAT for cars until the end of the year Car prices immediately dropped sharply Import tax on automobiles will be reduced to 0% in 2018 According to commitments

in ASEAN, in the period from 2014 to 2018, Vietnam will gradually reduce import tax

on CBU cars with regional value content from 40 % or more, from 60% (2014) to 50% (2015), 40% (2016), 30% (2017), and 0% (2018) The reduction of import tax barriers

to 0% will obviously have an impact on the Vietnamese car market

Over the years, we can see that the consumer's demand to buy cars seems to follow the fluctuations of taxes, when taxes increase, the price of cars increases, when taxes decrease, car prices decrease, people's consumption demand "fevers" hot” for a period

of time, but then gradually decreased when the tax increased and did not have any changes This is the normal psychology of consumers in the market, is the consumer's expectation for the Government's tax increase and reduction policy, they expect the tax

to increase in order to make a profit from the car they bought before discount to be able to buy a car at a reasonable price Businesses expect the tax to increase, because