Is it feasible to increase land sales tax rate in some hotspots? SGGP Investment & Finance had a discussion with Professor, Dr. Dang Hung Vo, Former Deputy Minister of Natural Resources and Environment and Hoang Van Cuong, Vice President of National Economic University and member of National Assembly, to further clarify this issue.
JOURNALIST: - The right to adjust the land sales tax rate should be delegated to the Government. This is a suggestion made by the Minister of Construction. What do you think about it?
Professor, Dr. DANG HUNG VO:
| “Land price increase or tax increase is not a problem if the increase does not look like a vertical line, or is unreal. It should move up gradually and reflect the true value of real estate”, said Professor, Dr. Dang Hung Vo.
- In my opinion, to cool-down the land fever, we have to consider as many solutions as possible, including tax increase. However, the key issue here is how to revise the Tax Law. If the proposal is to increase more government participation, it will not be enough. Revising the land tax rate mechanism will impact the enforcement of other taxes, such as individual income tax or corporate tax.
This is a complicated matter. It is not a big issue to delegate the government to adjust the land sales tax rate in case of land fever. However, the Tax Law should clarify the definition of land fever. How to determine the land fever and what are the standards? I think what we have to do is revise the law, not just delegate the task to the Government.
The theoretical rule of the real estate market is when tax burden increases, the land price will decrease. The land price increase helps to cut the manufacturing cost and increase competitiveness. In some developed countries, high tax rates are only applied in urban areas to avoid creating a cost burden on the poorer segment of people.
The land sales tax rate is a meaningful tool for the Government in many aspects. But the suggestion made by the Minister of Construction is not a complete solution. It should be studied more to come up with a more feasible and effective solution.
JOURNALIST: - What were the causes behind the land fever recently? Is the suggestion of the Minister of Construction reasonable?
Mr. HOANG VAN CUONG: - The land fever arises in some areas on which some projects are being planned or implemented. We see several hot bargains in Quang Ninh, Khanh Hoa, Kien Giang and Ho Chi Minh City recently. The price escalates and in turn spurs many people to get involved in land price speculation activities.
| According to Mr. Hoang Van Cuong, Vice President of National Economic University, some countries tax on the difference between trading value of two continuous deals. They don’t care if the deal is speculating or not, the shorter the time difference between two transactions, the higher tax rate the land sales will incur.
The demand increases while the supply remains unchanged, hence, of course the price also increases. The continuous land price increase is also caused by manipulation of brokers and traders. These people speculate, buy and sell for a quick profit. These factors create the land fever, and most fevers are unreal.
If we apply a high tax rate on these speculated land sales, it will help to cool-down the land fever and reduce manipulating activities. The peculators will have to consider more when the tax rate is higher. The increase in land price in the areas around the infrastructure or resident projects will bring more benefits for people living there, so raising the tax rate on these places is a good way to reallocate the social resources.
Increase tax is considered one of needed soluntions to counter real estate fever.
However, to implement it successfully, Government should notify on two issues. Firstly, it should inform the identity of the land owners. Many people own the land but are not registered as the owners; or many land sales are done without the name transfer. There are barriers to determine whether the land is transferred or not? Secondly, determining the land price is the other issue. The land price on the sale contracts is usually lower than the real traded price, or even just equal to the regulated price.
These two issues have not yet been fixed in Vietnam. People can own the land without registration. The government regulated land price is only changed every five years, hence, it is mostly outdated and far below the market price.
In other countries, the land price must be equal to the market price when the authorities determine the tax amount. The government land price in these countries is also changed every year. The land tax collection as a result is effective.
If you bought the land at a price of VND 10mn/m2, and at the year end the price increases to VND 20mn/m2, the price that the government has to compensate the land owner if he repossesses the land will be VND 20mn/m2. The difference between VND 20mn and VND 10mn will be taxed.
In Viet Nam, it is not easy to do the above method as the regulated land price is very different from market price and it is hard to identify the land owner. Hence, one of the important things we have to do right now is speed up the process to issue certificates of land rights.
- People are concerned that the proposal of the Minister of Construction will impact the locals, when actually there are only a few hotspots.
Professor, Dr. DANG HUNG VO: - We have seen land fevers happening in some localities like Van Don and Phu Quoc. Currently, the land fever is still spreading in Da Nang, Ha Noi and in some places where many rumors abound. Cooling down the land fever is necessary.
However, I care more about the method and the way we implement the method. If we don’t have solution to control the land fever, it will lead to a land price boom.
One more thing to note is that, since the last time, various locals have been implementing different ways to control the land fever. Some locals’ solutions have not been reasonable and lack a rational base. For example, when the land fever happened in Phu Quoc, the authorities there postponed all transactions related to land function change and land splitting; or in Van Don, Quang Ninh the authorities banned land sales transactions when the land price sky rocketed.
Applying some solutions to control the real estate market is needed, but these two above decisions are not suitable to the prevailing legal system.
According to the Land Law, the land sales transactions are only postponed if the government already has issued the decision to repossess that land. When there is no such kind of repossessed decision, the authorities’ banning will violate the regulations. Furthermore, if people have legal right to use and own the land, they will have the right to transfer it too.
It is not effective if we ban the transactions when we see land fever. This is not a professional method, easy to do but does not solve the problem completely.
The local authorities should understand the legal system and consider seriously the impact before issuing any decision. To determine the suggestion of the Minister of Construction whether it badly impacts locals or not, we have to clarify the definition of land fever, the standards to determine it, as I told you above.
- Land fever has also been caused by the information in-transparency that we should have an asset tax mechanism to treat speculating activities. What do you think about this idea?
Mr. HOANG VAN CUONG: - Yes, it is exactly correct. The information in-transparency is the base for speculators to push up the land price. However, we should also acknowledge that even if we are transparent in information announcement, the price will still increase as the project is truly there, although the price surge may be not too hot at a point of time.
The tax mechanism is very important in controlling and managing the land use and land sales. If we can find out a good tax mechanism, it will help to curtail speculating activities as these speculators have to consider more costs when they do the land sale transactions.
In foreign countries, governments usually apply a very high tax rate on the land that is not bought for construction or investment. Hence, most people there just buy and sell residential houses. On the other hand, in Vietnam, the profitability of house trading is not as good as land speculating. If we have a suitable asset tax mechanism, we can resolve this problem.
- Last time the Draft Asset Tax Law, which was proposed by the Ministry of Finance, faced strong resentment from residents. So far, do we have a new version of it?
Mr. HOANG VAN CUONG: - I think the dispute was caused by the way the issue was approached by the Ministry of Finance. In fact, it is not easy to convince residents to accept a tax rate increase. Theoretically, that policy is reasonable. But practically speaking, it is not reasonable to levy tax on a house with low value of VND 700mn.
I think the better way is we should focus on the land tax first. If we do not tax on the house value, low-income people who usually buy apartments will not be offended.
- To control the land fever what should we do?
Professor, Dr. DANG HUNG VO: - In the world, the land tax is used as a method for people to contribute to the national financial budget. Using land resources is treated fairly between different people. Land tax revenue usually contributes 30% to total national budget and is the main source to construct social infrastructure and public services projects. The tax rate on land value is usually around 1-1.5% and escalates by size of the land.
Land use tax, living house tax or tax on assets which relates to land are important tools to control speculating activities, reallocate the population density in some urban areas, limit people moving to hot cities as the government applies a high tax rate in these cities.
In Vietnam, the land fever is not just started by residents, but also by government officers. The solution to manage land fever is to reorganize our government staff, and prohibit them from land speculating activities. There should be a heavy punishment for government officers who indulge in land price manipulating.
The government should warn people not to participate in such speculating activities. Furthermore, we should help people understand the benefits of investment rather than speculation and that speculating activities will distort the market and the land price will increase due to speculation.
Land price increase or tax increase is not a problem if the increase does not look like a vertical line, or is unreal. It should move up gradually and reflect the true value of real estate.
- Thank you very much.