Experts are advising Vietnam’s lawmakers to take a slow approach to tobacco tax hikes, citing adverse effects other countries experienced from excessive tax raises. Photo credit: Rawpixel
Vietnam is reviewing proposed changes to its tobacco tax policies, with experts recommending a gradual increase every two years instead of yearly hikes. The Vietnam Tax Advisory Association (VTCA) has warned that sharp and sudden tax increases could have unintended consequences, such as encouraging illicit cigarette trade and reducing overall tax revenue.
VTCA recently submitted its recommendations to the National Assembly’s Finance and Budget Committee, addressing planned amendments to the Law on Special Consumption Tax. A key aspect of the proposed changes is the increase in tobacco taxes. Under the draft law, the government plans to introduce a hybrid tax system, combining the existing 75% ad valorem tax with an additional fixed tax per cigarette pack.
Two scenarios are currently under consideration. In the first scenario, the tax would increase by VND 2,000 ($0.08) per pack each year starting in 2026, resulting in a total rise of VND10,000 (US$0.40) per pack by 2030. The second scenario proposes an initial increase of VND5,000 (US$0.20) in 2026, followed by an annual increase of VND1,000 (US$0.04) from 2027 to 2029, also leading to a total increase of VND10,000 (US$0.40) per pack by 2030.
VTCA has urged lawmakers to approach the changes cautiously, noting that similar tax hikes in other countries have led to adverse effects.
In 2015, Malaysia introduced a 40% increase in tobacco taxes, followed by two more hikes between 2016 and 2018 that pushed the excise tax rate from 5% to 10%. By 2020, cigarette prices had risen by 25%, but smoking rates did not decline as expected. Instead, legal cigarette sales dropped by 55%, while illicit cigarette consumption surged to 65% of the total market. This shift forced three of the country’s largest tobacco producers to shut down their domestic manufacturing operations, contributing to a drop in government tax revenue. Higher taxes failed to significantly reduce smoking rates in Malaysia, as many smokers opted for cheaper, unregulated tobacco products instead of quitting.
Learning from Malaysia’s experience, experts suggest that Vietnam should take a more measured approach by raising tobacco taxes every two years rather than annually. A slower increase would give the market time to adjust while still achieving a tax increase of VND 5,000 ($0.20) per cigarette pack by 2030.
If this strategy is rejected, VTCA has recommended adopting the first proposal, which calls for an annual tax increase of VND2,000 (US$0.08) per pack starting in 2026, reaching a total increase of VND10,000 (US$0.40) per pack by 2030.