The Ministry of Finance has recently sent to the government a new tax pricing plan on imported single parts and components for the automotive industry. Specifically, the MoF suggests that import tariff apply to single parts and components rather than to complete-knock-down (CKD) and incomplete-knock-down (IKD) kits.
According to the current stipulations, the import tariff imposed on automobiles in complete sets stands at a high rate of 100% for under five-tonne passenger and goods carrying vehicles. Imported single components for assembling automobiles are subject to the two following categories of tax rates: 3-25% on imported CKD and IKD for assembly and 20-50% on imported single components for commercial trade.
However, according to vice finance minister Truong Chi Trung, the aforesaid stipulations no longer conform to reality. Specifically, in line with the strategy to develop the domestic automotive industry, the first priority is given to the encouragement of increasing the domestication rate of components and accessories. Most prioritised items are motors, gearboxes, and moving parts among others.
In Trung’s view, in order to bring into full play the above tax policy on CKD and IKD kits, this should also be linked to the domestication rate standards: “Nevertheless, failing to conform to what has been stated in the treaty on investment measures governing trade activities of the WTO called TRIMS, these stipulations are likely to cause discontent with partners while Vietnam is negotiating its accession to the WTO.
In addition, the current taxation policy is causing difficulties to customs clearance in the country. The reason is that although the Asean common import tariff still includes tax rates on CKD, many countries in the region no longer use it but price duties on single components and accessories
At present, about 70% of under 16-seat vans that are made locally are subject to a CKD duty rate of 25%. If the new tax pricing in accordance with incomplete components and parts is used, the average tariff rate will be lower than the prevailing rate of 20%. This means that companies specialised in assembling and making vans and trading in this area will be allowed a 5% import duty reduction. This means that tax receipts for the state budget will decrease by 50-70 billion dong per year. Logically, retail prices of these passenger vans will fall thus increasing demand for them.
In the meantime, the remaining vans are subject to an import duty rate higher than the current one on CKDs. Specifically, above 16 to under 30 seat vans are liable to the new import tariff which will be 5% higher in terms of CKD and 1% of IKD and single components. Above 30 seat vans will see a corresponding rise of 11-15% in import tariff rates.
According to the MoF, in a situation when road infrastructure remains poor, tax policies will play an important role in regulating the overwhelming increase in the demand for the use of automobiles in a certain period. As a result, the MoF suggests that in 2005, the government gradually reduce preferential special consumption tax by 50% for under six-seat vans as from January 1, 2005. To follow up this process, as from 2006, while checking on market developments, the status of traffic infrastructure and capabilities of home car makers, the MoF will make specific suggestions to the government about the new treatment of tax on van single parts and accessories.