VND29 Trillion to Bail out Businesses

 

Monetary policy has been loosened from the start of the year when the State Bank of Vietnam (SBV) repeatedly reduced deposit rate ceiling to 12 percent from 14 percent per annum. And, in early May, the central bank decided to cap lending rates for four selected sectors at 15 percent per annum. This agency also signalled to unwind lending conditions for real estate sector and allow commercial banks to reschedule debts incurred by temporarily troubled businesses.

 

The survey result recently released by the Vietnam Chamber of Commerce and Industry (VCCI) reveals a worrying reality. More than 18,700 companies were set up in the first quarter of 2012, down 10.2 percent year on year. Meanwhile, the number of businesses suspending operations with registered terms reached nearly 18,700. Some 10,350 enterprises went bankrupt, dissolved or ended operations in the reporting period, representing an increase of 14.8 percent over the same period of 2011. According to VCCI, in 2011 and early 2012, up to 8.4 percent of enterprises were dissolved and went bust.

 

Retail and service sales slumped 7 percent on year in the first quarter of 2012. Most economic sectors witnessed a decrease in revenues over the corresponding period in 2011. Tax collection fell but tax debts surged. GDP growth slowed to only 4 percent in the quarter while the index of industrial production (IIP) rose only 4.3 percent year on year. Businesses are hoping for a support solution to live through the tough time.

 

The bailout package was approved by the Government at the regular monthly meeting for April. On May 5, the Ministry of Finance announced the detailed fiscal package worth VND29 trillion to support businesses to overcome difficulties. The Ministry of Finance put forth five groups of solutions: macro regulatory solutions, public spending solutions, tax and fee solutions, price controlling and subsidising solutions, and tax administrative procedure reform solutions. These groups of solutions aim to resolve both aggregate demand and supply in order to help businesses on both input and output ends.

 

Deputy Finance Minister Vu Thi Mai asserted that these support measures not only direct to healthy businesses but also the entire economy.

 

Mr Vu Duc Dam, Minister and Chairman of Government Office, said at a press conference on the cabinet meeting on May 4 that basic contents of these solutions are VAT and corporate tax deferred payment for prioritised businesses and exempt some kinds of taxes and fees. Prioritised beneficiaries are small and medium enterprises (SMEs), processing enterprises operating in agriculture, forestry, fisheries, construction, real estate, shipping, and cement industries. Beneficiaries will enjoy 30 percent reduction of corporate income tax in 2012 and have a grace period of six months for VAT of the second quarter. In addition, the Government asked People's Councils at all levels to reduce 50 percent of land rents for commercial and service companies operating in their localities in 2012. Operators of inns for students and other business entities will be exempted excise taxes. In 2009, businesses also benefited from tax reliefs when the Government launched economic stimulus package which also included 30 percent cut in corporate income tax and 50 percent VAT reduction. Besides, wage-earners are also exempted personal income tax in six months.

 

In addition to tax breaks, the Government also focuses its measures on reducing inventories - the vital need of enterprises. The Ministry of Finance is expected to quickly allocate and assign basic construction investment capital and step up disbursements to help consume steel and cement. This agency will also add VND1,000 billion for watering systems, road construction, fishery development, etc. soon.

According to incomplete calculations by the Ministry of Finance, the business support package is worth VND29 trillion. Of the sum, nearly VND16 trillion of VAT deferments in the second quarter will stay with enterprises in six months. Each month, enterprises will have interest-free VND4,100 billion on average to invest in business operations. Business households will be exempted VND4.1 trillion of corporate income tax and excise tax. 50 percent reduction of land rents are worth of VND1.5 trillion, and the delay in effectiveness of road maintenance fees through 2012 value at VND3 - 3.2 trillion. Spending solutions are worth about VND2.67 trillion. However, the State Budget will suffer a loss of just VND9 trillion because the current reduction in budgets will support businesses to overcome difficulties and increase the State Budget revenues from the end of this year when the grace period is over. The budgetary loss from this package will be offset by crude oil revenues. Finance Minister Vuong Dinh Hue added that this support package is built on the spirit of “little money, much effect” mainly aimed to create working capital for enterprises.

 

The next meeting of the lawmaking National Assembly, set to open on May 21, will consider measures to support businesses, households and people to stabilise and develop production. Lawmakers will delve into the business support package of VND29 trillion recently announced by the Government in its regular meeting for April.

In reality, tax breaks will provide more capital for enterprises to invest in their business. The concern is where there is a benefit, there is an act of seeking personal interest. Tax authorities and banks will decide who will enjoy tax reduction and debt rescheduling with very general criteria. The enforcement requires instructive documents and there will be a policy lag. The give and take mechanism will potentially reappear.

 

Another very important aspect which is not mentioned in the bailout package is very weak purchasing power and alarming inventories. As people tend to tighten their belts, it will be very difficult to clear this stockpiling. If the purchasing power is not improved, it is hard to tell whether production will improve with supported capital. And, when businesses cannot sell products, they may use the support finance to pay debts, trim down production and even leave the market.

 

Besides, difficulties facing businesses also result from rising material prices, high borrowing costs and slow sales. Inflation makes people poorer quickly as incomes fail to compensate higher prices and they are forced to tighten their belts. Dr Nguyen Dinh Anh, Deputy Director of Price and Market Institute under the Ministry of Finance, said tax reliefs will help solve a very small part of problems of businesses because their health is too weak. Now, the key is stagnant purchasing power, low demand, high prices and growing inventories.