Proposal to Abolish Value-Added Tax (VAT) on Electricity Not Compliant with Current Laws

Ministry of Finance Responds to Proposal to Exempt VAT on Electricity and Implement a Uniform Electricity Pricing Mechanism

Introduction to VAT on electricity

Recently, voters in Lam Dong province submitted a proposal to the Ministry of Finance, suggesting the government consider abolishing the value-added tax (VAT) on electricity prices and adopting a uniform electricity pricing mechanism to ensure fairness for consumers and eliminate monopoly in the electricity sector.

However, the Ministry of Finance has officially responded that these proposals are not consistent with current legal regulations and the operational characteristics of Vietnam’s electricity industry.

Current regulations on VAT for electricity

According to the current Value-Added Tax Law, electricity is subject to the standard VAT rate of 10%. The law defines three VAT rates:

• 0% for exported goods and services.

• 5% for essential goods and services and inputs for agricultural production.

• 10% as the standard rate applied to other goods and services, including electricity.

The Ministry of Finance emphasizes that there is no provision in the law for VAT exemption or reduction specifically for electricity.

On the proposal to apply a uniform electricity price for fairness

The Ministry of Finance consulted with the Ministry of Industry and Trade, which stated:

• Electricity is a special commodity produced and consumed simultaneously, while storage costs are very high.

• The electricity sector prioritizes power plants with lower production costs first, then more expensive ones, to meet consumer demand.

• Many developed countries, including Japan and South Korea, use a tiered electricity pricing mechanism where prices increase progressively with higher consumption to encourage energy saving and ensure fairness.

In Vietnam, the tiered electricity pricing has been applied for years and has effectively encouraged consumers to use electricity efficiently and fairly among different consumer groups.

Electricity Law and pricing mechanism in Vietnam

According to the Electricity Law, retail electricity prices are determined specifically for customer groups (production, business, administrative, and residential) based on socio-economic conditions and the competitive electricity market level. Time-based pricing is applied for qualified customers, including:

• Peak-hour electricity prices

• Off-peak electricity prices

• Normal-hour electricity prices

For residential customers not participating in the competitive electricity market, the tiered pricing mechanism with increasing rates based on consumption volume remains in place.

Conclusion: VAT on electricity and current pricing mechanisms promote energy saving

The Ministry of Finance confirms that current VAT and electricity pricing regulations aim to promote efficient and economical electricity use, aligned with Vietnam’s electricity sector operations and legal framework.