Vietnam: What is inflation? What are causes and solutions for controlling inflation? How does inflation affect taxes?
Vietnam: What is inflation? What are causes and solutions for controlling inflation? How does inflation affect taxes?
Currently, the concept of inflation is not specifically defined in legal documents but related content can be found in regulations on national monetary and financial policies.
Below are analyses of the concept, causes, and solutions for inflation that you may refer to:
(1) What is the Concept of Inflation?
Inflation is the increase in the general level of prices for goods and services in an economy over time, leading to a decline in the value of money. When inflation occurs, the same amount of money will purchase fewer goods or services than before.
Specific Examples of Inflation:
- In 2015, the price of a bowl of pho in Vietnam averaged around 20,000 dong, but by 2024, the price had risen to 50,000 dong. This is a manifestation of inflation when the price of the same product rises over time.
- In Venezuela, due to hyperinflation, the price of a loaf of bread can increase tenfold within just a few months.
(2) Causes of Inflation:
The causes of inflation can be due to various factors, primarily including:
- Demand-Pull Inflation: When consumer demand exceeds the economy's supply capabilities, the prices of goods and services will rise.
Example: When the economy grows strongly, residents' income increases, they spend more >> the prices of goods increase.
- Cost-Push Inflation: When production costs increase (wages, raw material prices, taxes...) forcing businesses to raise selling prices.
Example: A rise in petrol and oil prices leads to increased transportation costs, causing prices of other goods to rise in turn.
- Excessive Money Supply Inflation: When the State Bank of Vietnam prints more money into circulation, with plenty of money but not a corresponding increase in goods >> prices rise.
Example: If the government issues too much money for public spending, the currency depreciates and causes inflation.
- Inflation from Expectations: When businesses and consumers expect future price increases, they raise prices in advance or stock up, causing actual prices to rise.
(3) Solutions for Controlling Inflation
- Reducing Cash in Circulation:
Having too much money injected into the economy reduces the currency's value, leading to inflation. A solution to control this is to reduce the amount of cash in circulation. One method is to increase bank deposit interest rates and discount rates, encouraging people to save money in banks instead of spending more. This reduces the money supply in the economy, helping to stabilize prices.
- Promoting Production and Business:
Strong inflation often occurs when supply cannot meet consumer demand. Therefore, an important measure to reduce inflation is to boost production and ensure the adequate supply of goods and services to meet market demand. This can be done by maintaining currency value stability, macroeconomic stability, and tight inflation control.
The State Bank of Vietnam needs to flexibly manage interest rates and open market tools to control financial stability. They need to effectively manage exchange rates and adjust them when necessary.
For state-priced goods or public services being implemented according to a market roadmap, careful calculation and preparation of appropriate pricing plans, along with timing adjustments, are needed. Simultaneously, closely monitoring supply and demand and price fluctuations of goods also helps make sound managerial decisions, contributing to inflation restraint.
(4) How Does Inflation Affect Taxes?
Inflation is not directly stipulated in specific tax legal documents, but the impact of inflation on taxes can be indirectly reflected in tax policies and tax adjustment regulations, specifically including:
- Value Added Tax (VAT): Inflation raises the value of goods and services. This leads to an increase in the VAT that businesses and consumers must pay, although the actual purchasing power of people decreases. Although the government may adjust tax rates or reduce tax rates to support the economy, if not, inflation will make consumers pay more for the same good or service.
- Corporate Income Tax: As inflation increases production costs and product prices, businesses may need to adjust selling prices to cover costs. However, if businesses cannot raise prices sufficiently to maintain actual profits, after-tax profits will be affected, impacting the amount of corporate income tax payable.
- Personal Income Tax Law: When inflation occurs, the actual value of money decreases, meaning workers' actual income is lower. However, if personal income tax rates are not adjusted according to inflation, workers may be subjected to higher tax rates compared to their actual income. This creates financial pressure for people.
The Government of Vietnam may adjust taxable income levels or tax rates to mitigate the impact of inflation on the populace.
- State Budget: Inflation may affect budget revenues if the government does not promptly adjust tax regulations. While taxes might increase with the nominal value of goods and services, if purchasing power diminishes, people and businesses will have less spending capacity, reducing total budget revenue.
- Fiscal Policies and Tax Adjustments: In the context of inflation, the Government of Vietnam may adjust tax levels, reduce taxes to support the economy, stimulate consumption and investment, or may increase taxes to curb the economy's overheating growth.
Thus, inflation can directly and indirectly impact the tax system, potentially leading to issues like reduced real income, increased tax burdens despite reduced purchasing power, and increased financial pressure on both businesses and individuals.
Note: Information is for reference only!
Is determining annual inflation rate targets a task of the State Bank of Vietnam?
Based on Clause 5, Article 4 of the Law on the State Bank of Vietnam 2010 regarding the tasks and powers of the State Bank, it is stipulated as follows:
Tasks and Powers of the State Bank
- The operations of the State Bank aim to stabilize the currency value; ensure the safety of banking operations and the credit institution system; ensure the safety and efficiency of the national payment system; contribute to promoting socio-economic development towards a socialist orientation.
- Participate in the development of the country's socio-economic development strategy and plan.
- Develop a banking sector development strategy to be approved by the competent state authority and organize implementation.
- Issue or propose to competent state agencies to issue legal documents on currency and banking; propagate, disseminate, and inspect under authority legal documents on currency and banking.
5. Develop annual inflation rate targets for the Government of Vietnam to submit to the National Assembly for decision-making and organize implementation.
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Thus, developing annual inflation rate targets for the Government of Vietnam to submit to the National Assembly for decision-making and organization of implementation is one of the tasks of the State Bank.
What is the current cash withdrawal fee rate at the State Bank of Vietnam?
Based on Article 3 of Circular 35/2014/TT-NHNN (amended by Clause 1, Article 1 of Circular 27/2019/TT-NHNN) stipulating the cash withdrawal fee rate at the State Bank is as follows:
- Credit institutions, foreign bank branches are exempt from cash withdrawal fees within a month if the value of cash withdrawn through payment accounts is less than or equal to the value of uncirculated standard cash deposited to the State Bank at the same branch.
- Credit institutions, foreign bank branches incur a fee of 0.005% on the positive differential within the month between the cash withdrawn through payment accounts minus the value of uncirculated standard cash deposited to the State Bank at the same branch.
