Discussion on the Draft Law amending and supplementing some Articles of the Law on Environmental Protection Tax

09/01/2018

   The Law on Environmental Protection Tax was passed by the 12^th National Assembly on November 15, 2010 at the 8th session, and has taken effect since 1/1/2012. After over 5 years of implementation, many contents of the Law on Environmental Protection Tax 2010 have shown many shortcomings. The amendment and supplementation of the Law on Environmental Protection Tax are necessary to meet the requirements of tax reforms and effectively meet the requirements of environmental protection and socio-economic development in the new context of international integration.

   On April 22, 2017, at the 9^th meeting session, the Standing Committee of the National Assembly agreed to submit to the National Assembly to add the Draft Law on amending and supplementing some Articles of the Law on Environmental Protection Tax into the National Assembly's Program of law and ordinance development 2017 for comments at the  session in October 2017. At present, the draft Law is being submitted to Ministries, sectors, localities, organizations and individuals concerned for comments. This paper puts forward some proposals and discussion to contribute to the amendment and finalization of the draft Law.

The proposal to increase environmental protection tax on gasoline, oil is particularly drawing a lot of public concern

   VIEWPOINTS AND APPROACHES TO THE DEVELOPMENT/AMENDMENT OF THE LAW ON ENVIRONMENTAL PROTECTION TAX

   Many countries in the world use Environmental Protection Tax as one of the important economic tools for two main purposes: To regulate the behavior of economic actors (producers and consumers) towards environmental friendliness; and to create financial resources for the provision of environmental protection goods/ services.

   For many countries, taxes are only regarded as environmental tax/environmental protection tax when they meet 3 criteria: Tax relates to the Government‘s environmental targets; the main target of the tax is to encourage positive behavior in terms of environment; tax is structured in line with the “polluter pays” principle and environmental targets, whereby the more pollution and harm to the environment, the higher the tax becomes.

 

Environmental protection taxable objects and absolute tax rates are specified in the following tariff schedule.

No.	Goods	Unit	Tax rate (VND/unit of goods)
			Law 2010	Proposals in 2017
I	Gasoline, oil, grease
1	Gasoline (except ethanol)	liter	1,000 - 4,000	3,000 - 8,000
2	Aeronautical fuel	liter	1,000 - 3,000	3,000 - 6,000
3	Diesel	liter	500 - 2,000	1500 - 4000
4	Petroleum	liter	300 - 2,000	No change
5	Mazut oil	liter (kg)	300 - 2,000	900 - 4,000
6	Lubricants	liter	300 - 2,000	900 - 4,000
7	Grease	kg	300 - 2,000	900 - 4,000
II	Coal
1	Brown coal	ton	10,000 - 30,000	No change
2	Anthracite	ton	20,000 - 50,000	No change
3	Grease	ton	10,000 - 30,000	No change
4	Other coals	ton	10,000 - 30,000	No change
III	Hydro Chlorofluorocarbon (HCFC) Liquid	kg	1,000 - 5,000	4,000 - 20,000
IV	Taxable plastic bags	kg	30,000 - 50,000	40,000 - 200,000
V	Herbicides of restricted use	kg	500 - 2,000	No change
VI	Termiticides of restricted use	kg	1,000 - 3,000	No change
VII	Forest product preservatives of restricted use	kg	1,000 - 3,000	No change
VIII	Warehouse disinfectants of restricted use	kg	1,000 - 3,000	No change

 

   As such, for the so-called environmental tax/environmental protection tax, the primary target which must be achieved is to create positive environmental impacts. If a tax does not reflect this target or is aimed primarily to increase revenues, it will not be regarded as an environmental tax/ environmental protection tax.

   In Việt Nam, from the Law on Environmental Protection Tax 2010 to the draft Amended Law of 2017, in the report of the Ministry of Finance, the environmental targets have been quite lightly- presented compared to the target of increasing revenue. Report on the draft Law in 2017 also does not include environmental impact/ efficiency assessment of the implementation of the Law in the past 5 years and the forecast for the next period. There is a lack of practical evidence to support the Ministry of Finance’s assessment that "the policy of environmental protection tax has recently contributed to reduce the production and consumption of polluting goods, stimulate the production and the use of environmentally friendly products, reduce pollution at source, raise environmental protection awareness of the whole society”.

   In order to create trust for people and businesses that "are willing to pay the tax", the draft Law on Environmental Protection Tax (amended) needs to be studied in the direction of extending the tax basis, modifying the taxable scope and objects, the tariff... and at the same time, providing clearer evidence and interpretations of the environmental targets that have been and will be achieved in the implementation of the Law.

   TAXABLE OBJECTS AND TAX RATES

   Under the provisions of the Law on Environmental Protection Tax 2010 (Draft Law on environmental protection tax 2017 not proposing adjustments), products/goods which have “negative impacts on the environment” are subject to the tax; and “negative impacts on the environment” is an important basis for identifying taxable objects, a measure for tax calculation, and the foundation for determining high or low tax rate for each type of product/goods. In relation to that provision, some issues need to be clarified / supplemented as follows:

   Regarding taxable objects: According to the experience of many countries in the world and the reality in Việt Nam, it is now time to research and put products with negative impacts on the environment such as electronic products, household electricity appliances, batteries, tires or synthetic detergents into the list of taxable objects.

   Currently, in Việt Nam, electronic products, electric appliances, batteries, tires, detergents... are the products with the volume of usage and disposal increasing rapidly over the years (the disposal of only electronic waste is about 90,000 tons/year), thereby creating a major impact on the environment and human health, both in the short and long terms. Although many of these products are hazardous wastes, they still are discarded arbitrarily with domestic solid wastes while the cost of domestic solid waste collection and treatment services remains low. The taxation of these products is necessary to reduce the consumption level and simultaneously provides funds for the special collection and treatment system with higher cost.

   Regarding the low tariff of coal products as compared to petroleum: The correlated comparison between the environmental impacts of petroleum and coal with the environmental protection tariff for these fuels showed the big and irrational difference. This may have been the reason for the high increase in the investment in the development of coal-intensive heavy industries with high pollution risks including coal-fired thermal power, steel-making, cement and chemicals industries in the past time. In addition, that petroleum and coal are substitutes for each other could have an unwanted effect, which is the switch from the use of coal to petroleum.

   Tax rates for petroleum and diesel are, respectively, 80 - 100 times and 40 - 50 times higher than the tax rate for coal. According to the draft Law in 2017, this gap will continue to increase. Meanwhile, the contamination and detrimental impacts of coal on the environment is much higher than those of petroleum. In terms of chemical compositions, according to Petrolimex standards (TCCS01: 2015/PLX and TCCS 03: 2015/PLX) and national standards (TCVN8910: 2015), the sulfur and ash contents in coal are, respectively, 35 - 257 times and 300 - 4,500 times higher than those in petroleum. According to the US Energy Information Administration (USEIA), to generate the same energy unit, the air pollutant emissions from combusted coal is higher than that of combusted petroleum: SO₂ is 2.3 times; dust is 32.7 times; CO₂ is 6.3 times and mercury is 2.3 times higher (average emission level can fluctuate depending on type of coal, petroleum as well as combustion technology, operating conditions, longevity of equipments...) According to the International Energy Agency (IEA), total CO₂ emission causing greenhouse effect originated from all fuel combustion activities of Việt Nam is 143.3 million tonnes in 2014, of which the combustion of coal accounted for 55%, petroleum 30% and gas 15%. As such, coal is the largest and dominant source of air pollution in Việt Nam. Not to mention, ash from combusted coal is also a source of environmental pollution and occupies a lot of land.

   Although coal exploited domestically is subject to natural resources tax and fees such as environmental protection fees for wastewater, mining fees... but it is only in the stage of exploitation. Therefore, it is necessary to consider raising the tax rate/ tariff of environmental protection for coal consumption, including both domestically exploited and imported coals.

   Regarding the high tariff for and the large tax revenues from petroleum: The current tax rate for gasoline is 3,000 VND/l. If converted separately for the CO₂ emissions from gasoline combustion, which is 2.341 kg/l, the equivalent tax rate is 1,281,500 dongs/ton of CO₂ or 56.45 USD/ton CO₂. If it is implemented in accordance with the draft Law on amendment, the tax rate would be 56 - 150 USD/ ton, which is much higher than the highest rate of 130 USD/ton of CO₂ applied in Sweden and the average rate of 10 USD/ton which many countries are applying.

   The Ministry of Finance argues that because the tax rate (import tax, special consumption tax, environmental protection tax, value added tax) on the base price of Việt Nam is low (37.49% for gasoline, 20.76% for diesel; 11.59% for fuel, 19.13% for mazut) and the gasoline price is also low compared to many countries such as South Korea, Cambodia, Laos, Philippines, Hong Kong or Thailand, it is necessary to raise the tax rates. This seems not to be convincing.  Meanwhile, in some countries such as Malaysia, Indonesia, the US, or Australia, the gasoline price is not as high as that in Việt Nam.

   If import tax, special consumption tax (excise tax), and VAT are included, the contribution of the petroleum sector is about 9.8% of total budget revenue. If the maximum new environmental protection tax rate is applied and the import tax is eliminated according to the road map, the contribution of petroleum will increase to 14 - 15% of total budget revenue. If the environmental protection tax increase to compensate for the decrease of import tax, it is necessary to consider that: environmental protection tax rate of 3,000 VND/l was higher than the maximum import tax rate of 35% of the base price (now it is reduced to 12%). Is this “over-compensation” necessary if the impacts on the environment-economy-society are considered?

   From a different perspective, it is unreasonable for petroleum to play a key role in the revenue source of environmental protection tax in the past time and expectedly in the coming years. In 2016, the environmental protection tax on petroleum has reached VND 41,062 billion, accounting for over 93% of the total environmental protection tax revenue, of which VND 21,200 billion is collected from gasoline. According to the level of negative impact to environment, financial responsibility for the environment must be shared by many other sectors, and the gasoline can not be "forced" to be responsible for almost all others. The thinking of "choosing easy-to-tax and easy-to-collect areas” to propose the increase of environmental protection tax also needs to be changed.

   THE IMPACT OF THE ENVIRONMENTAL PROTECTION TAX INCREASE FOR PETROLEUM

   Many international and domestic studies have shown the negative impacts of increasing petroleum price on industries such as agriculture, fisheries, transportation; small and medium-sized enterprises (SMEs), middle-income and low-income groups are also the most negatively affected by petroleum price increase.

   As proposed in the draft Environmental Protection Law (amended), the current double tax rate increase, according to the Ministry of Finance's argument, would not affect the price of petrolium and businesses; but clearly, when introduced into the Law and passed, this tariff will be the legal basis for increasing taxes in the upcoming time. Tax increase will result in higher petroleum price. Because petroleum is still an essential input for many economic sectors as well as for people’s livelihoods (demand is inelastic to prices), consumption will not decrease significantly, so the level of negative impacts on the environment does not drop. However, the increase in gasoline price will result in higher cost in production, transportation, circulation and distribution... The price rate increase will lead to inflation, reduction in domestic consumption, the competitiveness of enterprises and the attraction of investment environment, increase in inequality among population groups.

   In order to receive the support of citizens and businesses to ensure the feasibility of the Law, a more cautionary (socio-economic) impact assessment should be made on proposals in the draft amended Law, in particular, the adjustment of the double tariff for gasoline, oil and grease, to forecast the impacts and measures to prevent negative impacts; evaluation can be conducted before promulgation of tax rate without having to waiting until after the issuance of new tax rates.

   THE USE OF ENVIRONMENTAL PROTECTION TAX REVENUE

   According to the report by the Ministry of Finance, the environmental protection tax revenue has steadily increased over the years. In 2016, after adjusting the environmental protection tax rate from VND 1,000/l to VND 3,000/l, the total environmental protection tax revenue has reached VND 42,393 billion, accounting for 4.08% of the total budget revenue. However, spending on environmental protection is still lower than the revenue - although the specified level is not less than 1% of total state budget expenditure and gradually increases with economic growth. Specifically, total expenditures for environmental protection in 2015 were VND 11,400 billion (less than half of the revenue of VND 27,020); VND 12,290 billion in 2016 (only over a quarter of the revenue). In the period of 2011 - 2015, expenditures on environmental protection reached VND 47,452 billion, only slightly higher than the total tax revenue in 2016. Among them, there are expenditures for economic activities of the Central budget, such as investigation and evaluation projects on land, geology minerals, water resources, sea and islands, etc. are the areas of natural resources sector and related economic activities. Thus, the actual expenditure for environmental protection is much less.

   The Law on Environmental Protection Tax in 2010 and the draft Law on Environmental Protection Tax (amended) in 2017 only regulate the tax collection but do not cover any provisions regulating the management and use of environmental protection tax. It can be seen as a significant shortcoming that could degrade the trust of people and businesses about the transparency in the revenues and expenditure of environmental protection tax in the past time. Although  it is possible to increase the environmental protection tax to compensate for the the import tax reduction according to the trend of revenue restructure, the draft Law still needs to supplement the provisions on management and use of revenues, ensuring sufficient expenditures for environmental targets, incentives for research, development and application of energy savings, carbon emission reduction technologies; switching to environmentally-friendly forms of energy and also regulating the transparency of revenues and expenditures from environmental protection tax so that people and businesses can easily follow.

   SOME OTHER RECOMMENDATIONS

   First, to consider other types of plastic products besides bags but also have environmental impacts as plastic bags; to regulate the equivalent tax rate at 10 - 12 Euros/kg or in bags, 0.7 - 1Euro/bag as many European countries do.

   Second, to research on the tax calculation measure according to the environmental impact level of a product unit on pollutants such as SO₂, CO₂, mercury, phosphate. For example, if the tax on CO₂ is calculated at about $10 - 16/ton, the revenue from environmental protection tax from coal can be up to VND 45 trillion, petroleum is about VND 10 trillion, an increase of more than VND 13 trillion in total compared to the present.

   Third, to propose to research and develop laws on other taxes than environmental protection tax to compensate for import tax; for example: The amended special consumption tax (excise tax), property tax... have been adopted by many countries, creating a large revenue but no draft law or proposal from the Ministry of Finance is included in the legislative program in the next 1 - 2 years.

   Fourth, the amendment of the Law on Environmental Protection Tax will directly, deeply and extensively affect the people, businesses and environmental and socio-economic targets of the country. Therefore, it is not necessary to “race” in terms of time but need to continue to review and evaluate it comprehensively and thoroughly before promulgation. Ministry of Natural Resources and Environment should get opinions from scientists to contribute to the identification and expansion of taxable objects; the clarification of the scientific basis as well as the reality of the tariff and other proposals in the draft Law on Environmental Protection Tax (amended).

Assoc. Prof. Dr. Lê Thu Hoa
Faculty of Environment and Urban, National Economics University