Shortcomings in VAT regulations for the fertilizer industry.

After nearly 10 years of implementing Law No. 71/2014/QH13 (Law No. 71) amending and supplementing several articles of tax laws (effective from January 1, 2015), which stipulates that fertilizers, machinery, and specialized equipment serving agricultural production are exempt from value-added tax (VAT), many shortcomings have emerged, causing difficulties for the fertilizer industry and hindering its development.

Urea fertilizer production at Ninh Binh Fertilizer Company Limited (Vietnam Chemical Corporation).

The Value Added Tax Law of 2008 stipulated that fertilizers were subject to a 5% VAT rate. However, since the implementation of Law No. 71, fertilizers have been exempt from this tax. While seemingly beneficial to farmers and manufacturing businesses, this regulation has actually created difficulties, as businesses are not allowed to deduct input VAT already paid, leading to increased production costs.

It is necessary to impose VAT.

Nguyen Tuan Hong, Director of the Bac Hong Safe Vegetable Production and Consumption Cooperative (Dong Anh district, Hanoi), said that since the implementation of Law No. 71, fertilizer prices have increased by up to 30% compared to before, preventing businesses from receiving VAT refunds and forcing them to add that amount to the selling price of their products. The current situation is even more difficult due to the scarcity of raw materials and the impact of global fluctuations and conflicts following the Russia-Ukraine war, which continue to drive up fertilizer prices. “Removing fertilizers from the VAT-exempt list not only fails to bring benefits but is also very problematic, increasing fertilizer prices. Meanwhile, fertilizers are a crucial input for farmers in all agricultural production activities,” Mr. Hong emphasized.

According to Mr. Hong, before 2014, the cost of fertilizer for cultivating one sao (approximately 1000 square meters) of vegetables was only about 300,000 VND, accounting for about one-third of the total input costs. Since 2014, fertilizer prices have increased significantly, raising the cost to nearly 500,000 VND. This means a 30-35% increase in fertilizer costs, eroding farmers' profits. "If the government doesn't have appropriate adjustment mechanisms and policies, while fertilizer prices are projected to continue rising in the future, it will overwhelm farmers, especially small-scale producers," Mr. Hong worried.

Recalling the times when fertilizer prices were "double-affected" by global fluctuations in 2022, Mr. Hong said that many vegetable farmers in Bac Hong village abandoned their fields, temporarily stopped production, and switched to working as hired laborers elsewhere, because the selling price of vegetables was not enough to cover input costs, especially the cost of fertilizer, while the market for agricultural products and the output of agricultural production were extremely uncertain.

Another drawback is that since 2014, fertilizer companies, due to cost-cutting measures, have reduced support programs for farmers regarding selling prices and seedling trials. As a result, agricultural producers are at an even greater disadvantage than before. Therefore, representing the opinions of the households in the cooperative, Mr. Hong proposed reinstating fertilizers to a 5% VAT rate to create more favorable conditions for agricultural production. When fertilizer prices decrease, the profits of farmers and agricultural producers will increase. Large-scale producers will see a clear benefit, giving them more confidence in investing in production.

Urea products from Ha Bac Fertilizer and Chemical Joint Stock Company before being released to the market.

Similarly, Nguyen Van Thu, Chairman of the Board of Directors of GC Food Joint Stock Company, believes that fertilizers should be subject to a 5% VAT again to support farmers in terms of price. At the same time, the State and the Ministry of Finance need to carefully consider VAT-related products in agricultural production to ensure a balance and guarantee profits for farmers and agricultural producers in general, avoiding situations where profitable production turns into losses due to inadequate tax policies. “The policy of exempting fertilizers from VAT in the past has been one of the factors increasing fertilizer prices, causing disadvantages for agricultural producers. At times when fertilizer prices are affected by global economic and political factors, the agricultural sector is even more disadvantaged, reducing business profits,” Mr. Thu affirmed.

Promoting technological innovation

A representative from a fertilizer manufacturing company in the northern region affirmed: Since the implementation of Law No. 71, domestic fertilizer manufacturers have suffered significant losses. Fertilizer businesses are not allowed to deduct or claim refunds for input VAT on goods and services used in production, as well as for investment in expanding production and acquiring new technology and machinery. Furthermore, with the non-deductible input VAT, fertilizer manufacturers are forced to factor it into production costs, increasing product prices, forcing them to raise selling prices, and leading to decreased sales and lower business efficiency.

Representatives from the Ministry of Industry and Trade analyzed that, during the 10 years since the implementation of Law No. 71, market management forces have detected and handled an average of 3,000 cases of fertilizer smuggling and counterfeit fertilizer production annually. Calculations show that counterfeit fertilizers cause an average loss of approximately US$200 per hectare, resulting in an annual loss of US$2.6 billion for the agricultural sector. This is particularly dangerous as Vietnamese agricultural products aim to export to major global markets. In this context, the issue of VAT on fertilizers is becoming increasingly urgent, as it is one of the factors significantly impacting domestic production and contributing to the vitality of agriculture. According to the Food and Agriculture Organization of the United Nations (FAO), along with factors such as seeds, irrigation, and agricultural mechanization, fertilizers contribute more than 40% to improving crop yields. Therefore, the inadequate VAT policy on fertilizers, which has been in place for nearly 10 years, needs to be changed soon.

Since fertilizers were exempted from VAT, data from the Vietnam Fertilizer Association shows that total import volume has fluctuated between 3.3 and 5.6 million tons; the value reached 952 million to 1.6 billion USD, while total domestic production capacity has been shrinking, from 3.5 million tons/year (before 2014) to only 380,000 tons/year (from 2015). Dr. Phung Ha, Chairman of the Vietnam Fertilizer Association, said that according to the assessment of the project to strengthen the competitiveness of Vietnam's private sector, from the State's perspective, applying a 5% VAT on fertilizers would increase budget revenue by an additional 1,541 billion VND, due to the collection of 6,225 billion VND in output VAT on fertilizers and the deduction of 4,713 billion VND in input tax.

Discussing the VAT policy on fertilizers, agricultural expert Hoang Trong Thuy argued that if a 5% tax is not applied to fertilizers, businesses will have to bear the burden instead of the State and farmers. Fertilizer imports will continue to increase and risk dominating the market, forcing the domestic fertilizer industry to scale back production. The resulting consequences include the risk of business bankruptcy, job losses, decreased budget revenue, and a shortage of quality domestic fertilizer products. This reality inadvertently contradicts the policy of promoting agricultural production development.

If a 5% VAT is applied to fertilizers, some argue that farmers will be disadvantaged. However, in reality, comparing only the selling price, this is only a small aspect of the larger issue. VAT is a revenue collected from the end consumer, so farmers also need equality with other stakeholders. Agricultural products are part of the agricultural production chain, with a final output, so they are legally subject to taxation.

According to agricultural experts, the obvious benefits of applying a 5% VAT to fertilizers are that it helps the State better manage this industry, harmonize interests and obligations with national monetary policy, and ensure fairness under the law. Businesses can deduct input costs, reducing their burden, which in turn creates incentives to promote investment in production technology innovation, improve product quality, meet domestic consumption needs, and aim for export.

Source: https://baoquangninh.vn/bat-cap-trong-quy-dinh-thue-vat-doi-voi-nganh-phan-bon-3327976.html