Given the ongoing economic uncertainties, the submission of Official Letter No. 8217/BTC-CST to the Prime Minister in early June on tax exemptions applicable? to? stock? investors? was? welcomed? by many financial experts as they believe it will relieve pressure on investors amid a tumbling VN-Index
According to the Vietnam Association of Financial Investors (VAFI), the stock market is experiencing its most difficult time ever. The VN-Index and HN-Index have fallen 20 percent compared with 2010, making the stock transfer tax an important issue. In Vietnam the difference in tax provisions for stock market investments and interest earned on bank deposits is stark, as interest payments are tax-free while the dividends tax stands at 5 percent. So the appearance of the Official Letter has been welcomed by market players.
The? Letter? proposes? that,? from? August? 1? to? December? 31 this year, stock transfers by individuals will enjoy a partial tax exemption (20 percent is not taxed, or 0.1 percent paid on the total transferred value). Taxes levied on dividends accrued from investments will also be cut by 5 percent during the period. A representative from the Ministry of Finance, however, said that the tax cuts are not applied on dividends from commercial banks, financial investment funds, or credit institutions, as their dividends can be quite high, at more than 10 percent at times.
The sooner the better
From VAFI?s perspective, the proposal to cut tax rates will stabilize the stock market and maintain its role in the economy. Once the tax cuts are applied, investors will see the stock market as being more profitable than depositing in banks. Money will then flow into the stock market ? a direct funding channel ? not the banking system, so entrepreneurs, especially those in production, can access cheaper capital, which is a positive as regards economic recovery. Commercial banks are also pleased because it will ease the pressure on them to limit credit growth to less than 20 percent this year The idea that tax rates should have been adjusted earlier has? merit, when comparing Vietnam? stock market with Thailand?s.
The Thai stock market is much larger than Vietnam?s both in terms? of scale and value, with a market value of about US$140 billion. The future prospects for the Thai economy are also brighter, with low interest rates, low inflation and a trade surplus. Yet it applies no tax at all on stock transfers and dividends, to promote the market. In Vietnam, meanwhile, with a smaller market scale,of some US$40 billion, ongoing high interest rates and inflation and a trade deficit, economic expectations remain gloomy at best. Moreover, the attraction of other investment channels such as gold, real estate or foreign currencies has seen the appeal of the stock market diminish. From 2008 to 2010, value and liquidity in Vietnam?s stock market fell 60 percent. Losses among some investors were significant and not helped by the 20 percent personal income tax applied on stock transfers and dividends.? ?It would be better for the market if taxes on stock transfers and dividends had not been included in the Law on Personal Income Tax when it came into being in 2007,? according to VAFI.
Fair play?
?Exemptions on personal income tax from stock transfers and dividends are not fair for all,? said Mr. Phung Quoc Hien, Chairman of the National Assembly?s Finance and Budget Committee. Stock transfers, he continued, are a business activity? and so should be taxed. Tax reductions are reasonable, he argued, but exemptions should only be applied to urgent cases. Moreover, the Committee believes that tax payable should be calculated on profit levels: the lower the profit, the lower the tax.
Some social activists have also expressed opposition to the official Letter. The Ministry of Finance argues that the cuts to dividend taxes are aimed at bridging the difference between income from bank interest payments and income from dividends. But most depositors are in the middle- and low-income brackets, while financial investors tend to be high-income earners. The Letter therefore benefits the wealthy, and the gap between rich and the poor within society will become greater.
According to estimates from the Ministry of Finance, if the proposal is accepted then in 2011 the tax exemptions will cost VND450-500 billion, or only 8.5 percent of the total tax exemptions the Government has planned for this year. The effect of such tax exemptions on the State budget is therefore not overly significant. And because it also stipulate tax cuts for many types of earnings ? not only stock investors but also entrepreneurs and employees ? it comes with a degree of fairness. The ?side effects? are not as great as many believe.
More importantly, tax exemptions on income from stock transfers and dividends have a positive psychological effect. Once the stock market shows signs of recovery, belief in an economic upturn will also come. Vietnam may have the chance to attract more foreign capital and the future of the economy will be brighter as a result.
Vietnam Financial Review
Source: http://www.saigonmoney.com/2011/09/20/stock-transfer-and-dividend-tax-a-burden-eased/
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