Impacts of the new VAT Law on agricultural exports

The amended Law on Value-Added Tax (VAT) (No. 48/2024/QH15), effective from July 1, introduced a “pay first, refund later” mechanism that has created major issues for exporters and raised concerns about the potential misappropriation of tax funds. The new mechanism has sparked anxiety at many businesses, especially those in the agriculture sector. Some suppliers have scaled back or temporarily suspended operations while awaiting clearer policy guidance.

A key question troubling companies is whether those that both directly produce semi-processed goods and purchase raw materials for further processing will be classified as taxable under the new rules.

Exporters under pressure

As soon as it was implemented in practice, the amended Law exhibited significant shortcomings, particularly for businesses in agriculture. Ambiguities in its provisions have made it difficult to determine tax obligations.

Speaking at the “Overview of New VAT Policies” seminar in mid-July, Mr. Nguyen Van Phung, former Director of the Large Enterprise Tax Administration Department at the General Department of Taxation, acknowledged that existing VAT provisions are rather “tricky” for businesses. “At first glance, these provisions look almost identical, differing only in the presence or absence of the word ‘excluding’ and whether import activities are mentioned,” Mr. Phung explained. “But in practice, for domestic goods, the ‘first stage’ means when the producer sells directly; while for imports, the ‘first stage’ is the point of import. In both cases, the goods are exempt from VAT. However, as soon as they move to the ‘second stage’ - no longer the direct production stage or the import stage - the 5 per cent VAT rate applies.”

Previously, under Clause 5, Article 5 of Circular No. 219/2013/TT-BTC guiding the implementation of the Law on VAT, unprocessed or simply processed agriculture, livestock, aquaculture, and fisheries products in the commercial trading stage were subject to the “no declaration, no calculation” mechanism, meaning the VAT rate and amount on invoices could be struck out. Additionally, commercial sales revenue was considered taxable revenue, while revenue from the production stage was subject to a VAT exemption. The new tax policy has changed this approach, creating difficulties for businesses in allocating revenue and declaring VAT.

From July 1, rice and coffee - two of Vietnam’s strategic agriculture exports - will officially be subject to a 5 per cent VAT under the Law. Just days after the regulation took effect, the Vietnam Food Association (VFA) and the Vietnam Coffee - Cocoa Association (VICOFA) sent petitions to the Prime Minister calling for both items to be removed from the 5 per cent VAT category.

VFA data shows that in the first half of 2025, Vietnam’s rice exports were relatively positive at over 4.7 million tonnes. However, the Association warned that if tax issues are not resolved, businesses will struggle to sustain growth in the second half of the year, as new contracts will have to factor in additional financing costs.

Industry associations say financial pressure is the greatest bottleneck facing businesses. The VFA noted that companies must pay 5 per cent VAT at the trading stage, but banks do not finance this tax amount when providing working capital. As a result, corporate cash flow gets “stuck” in transactions, reducing business efficiency. While this locking-up of capital is a challenge, the tax refund process is also far from smooth, making it difficult for companies to recover paid taxes, especially small and medium-sized enterprises (SMEs) with limited financial capacity.

Beyond cash flow, global competition is another serious concern. Vietnamese rice prices are currently higher than those in Thailand and India - countries that either do not levy a VAT or provide more flexible export support. Meanwhile, a decline in yields in some key growing areas has tightened domestic supply, further squeezing profit margins and adding to competitive pressure.

The coffee industry faces similar difficulties. According to VICOFA, Vietnam exported nearly 1 million tonnes of coffee worth $5.5 billion in the first half of this year, up 5 per cent in volume and 66 per cent in value year-on-year. Raw coffee prices have exceeded VND100,000 per kilo; the highest in years and sharply increasing working capital needs for trading and exports.

In its recent petition, VICOFA Chairman Nguyen Nam Hai said the 5 per cent VAT has significantly increased capital strain on businesses. The challenge is compounded by the “pay first, refund later” system, which exposes exporters to higher risk as refund processing can be lengthy, even when they have fully met their tax obligations to sellers.

Easing risks and costs

The VICOFA Chairman also highlighted a paradox: over 85 per cent of Vietnam’s green coffee is exported annually, with the rest consumed domestically. Given this structure, most VAT collected on green coffee is refunded, contributing little to the State budget. Meanwhile, imposing a 5 per cent VAT and then refunding it not only increases capital pressure but also adds to administrative procedures.

Under the 2008 Law on VAT No. 13/2008/QH1, green coffee was subject to a 5 per cent VAT, which created loopholes for fraud and caused budget losses. In response, the government removed the VAT on green coffee in 2013 to support exporters. However, the recently-amended Law on VAT reintroduces the 5 per cent VAT on green coffee, raising concerns that past risks could resurface.

Sharing this view, VFA President Do Ha Nam warned that the current VAT refund mechanism carries significant risks for exporters. Firstly, they often advance VAT to suppliers rather than paying it directly to tax authorities, and second, exporters typically receive payment for shipments 3-6 months after delivery. Under existing rules, VAT is refunded only once the payment is actually received. This delay strains working capital and, in risky cases, leaves businesses without both the advanced tax and operating funds. Large amounts of VAT being held up also deprive companies of the capital needed to maintain production, affecting the wider agricultural export system. The refund process also requires substantial human resources to complete the paperwork, but without tight controls there is still a risk of refunds going to the wrong recipients, slowing the process and creating bottlenecks.

Thirdly, input prices are always lower than export prices, while VAT refunds are based on the selling price. This means the State must cover the tax gap between input and output values, causing budget losses. Some companies even exploit this policy to appropriate State funds.

Based on such realities, VICOFA and VFA jointly recommend removing the 5 per cent VAT on rice and green coffee. If immediate changes are not possible, they propose a faster, more flexible refund mechanism to reduce financial pressure and maintain competitiveness in key agricultural exports.

They also call for clear guidelines on verifying sellers’ tax declarations, allowing refunds for businesses with complete, valid documentation and no signs of fraud. An automated digital verification system should be implemented to reduce manual checks, speed up refunds, and minimize risks for both companies and authorities.