A series of tax hikes aimed at encouraging foreign-invested auto manufacturers in Vietnam to increase local content ratios has left the industry seething and predicting impending closures.
From today, import duties on complete-knocked-down (CKD) component kits for vehicles with 15 seats or less increase to 25 percent from the previous 20 percent.
Under the finance ministry's Decision 110, which was signed off on July 25, the rate for 16 to 24 seaters rises to 15 percent from 10 percent, and doubles to 10 percent for larger capacity vehicles.
The government has justified the increases as a means of helping the domestic parts industry grow by forcing manufacturers to raise their local parts content rather than importing them from abroad for assembly in Vietnam.
In a separate decision announced in June, special consumption tax (SCT) will rise from its current five percent to 24 percent on cars with five seats or less from the beginning of next year, with similar gains for larger vehicles.
The SCT rates will increase annually until 2007, at which point cars will be taxed at an outlandish 80 percent and other sized vehicles at between 25 and 50 percent.
To compound the industry's woes, value-added tax on CKD imports will also double to 10 percent across all vehicle categories from next January.
The Vietnam Automobile Manu-facturers Association (VAMA), which is made up of 11 foreign-invested companies including Toyota, DaimlerChrysler and Ford, says the tax increases will devastate the industry.
It predicts sales will plunge by 30 to 40 percent next year as the companies are forced to pass on these added costs to consumers.
"Currently we are making around 30,000 units per year. Over the last few years, the automotive industry is growing very fast at 30 [to] 50 percent annually. Now the dramatic increase in price will stop this growth, and worse, bring our sales volume fall back to the volume of 1999 [to] 2000 period," a spokesman for the industry association said.
"In that situation, of course our revenue and profit plans will suffer a heavy blow. Our business plans will not be healthy any longer," the spokesman said.
"Many VAMA members may have to close their operations in Vietnam. The whole industry is put under the risk of a shaky future," he added.
All vehicles assembled in the communist nation, where motorbikes remain the undisputed kings of the roads, are for domestic consumption.
The government has come under heavy flak for its handling of the issue from VAMA, which only got wind of the tax proposals at the end of January and which were originally slated to come into force from April.
The situation is very different from what auto manufacturers had envisaged when they flocked into the communist nation in the mid-1990s ago seeking to tap anticipated soaring income levels.
Their business plans, however, were derailed by the 1997 to 1998 Asian financial crisis, and today annual per capita income is only around US$400, way below the US$3,000 to US$4,000 mark that experts say is necessary to maintain satisfactory growth in the industry.
To date VAMA members have invested over US$500 million in Vietnam, excluding related investments in companies supporting the auto industry.
But its investment future now looks bleak.
"We have actually canceled many of our planned investment projects because they are not feasible under the new tax scheme. This has adverse effects on both the automotive industry as well as Vietnam's total foreign investment," the VAMA spokesman said.
Tony Foster, chairman of the Hanoi chapter of the American Chamber of Commerce, concurs that the tax increases will trigger concerns among potential investors in the Southeast Asian country.
"The auto industry has invested a substantial amount of money here and to change the ground rules fairly substantially tells foreign investors that they could be in for a nasty shock," he said.
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