Land Tax an effective source for urban development

Need to change the methods of price determination

SGI

There are four basic issues in the land revenue system in Vietnam that need immediate evaluation in order to adapt to the current situation: (1) completion of the land pricing system; (2) categorizing and specifying mechanisms that assess value of land in the market; (3) changing the system of taxation and applicable fees for land use; (4) clarifying that investments from land users do not increase land value.

There must be highly progressive levels of land use tax to prevent unused or abandoned land. Photo: LONG THANH

There must be highly progressive levels of land use tax to prevent unused or abandoned land. Photo: LONG THANH

Completion of land pricing system

In the process of developing the Land Law in Vietnam, the management and determination of land prices have been under reform far too slowly. Firstly, the use of independent price determination is still considered to increase the cost in land management. This is a misconception because international experience has shown that one dollar spent today will bring back ten dollars tomorrow. Secondly, some government officers do not believe in the private sector, so they just want to maintain the right over independent price determination. This idea is very likely to cause corruption in government regulations and affect decisions on land prices.

The Land Law issued in 2013 showed new progress in the management of land prices, in which the government land price frame and the provincial People's Committee land price are used to calculate taxes, duties on land use, and other land price incentives. Other cases must have specific land price determination where the land price process consists of three steps. Step-1: The provincial Department of Natural Resources and Environment proposes land prices, which may be outsourced at independent land price determination institutions. Step-2: The provincial Land Price Assessment Council assesses the determination. Councils are established by the Chairperson of the provincial People's Committee to play the role of a standing unit of provincial Department of Finance and the members are independent price determination experts. Step-3: Chairperson of the provincial People's Committee makes decisions on land prices.

This is a model based on the experience in Taiwan (China), but two most important things have not been applied. According to the original model in Taiwan, the proposal of land prices in Step-1 is made by an independent land price determination institution, and more than 50% of the members of the provincial Land Price Assessment Council are price determination experts working outside the government controlled sector. With this difference, the Taiwanese model is much more independent and objective than the Vietnamese model.

Therefore, the revised Land Law should state that Step-1 is the land price proposal made by an independent land price determination institution, and more than 50% of the members of the provincial land price assessment council are independent price determination experts (government officials as members of the council should not exceed 50%).

State determines land prices

One of the biggest difficulties now is that it is impossible to establish a database on market land prices, because the actual land prices are not recorded in land transaction contracts. Meanwhile, the Land Law issued in 2013 stated that the taxes are determined in accordance with the list of land prices introduced by the provincial People's Committee. In this way, we can hardly build a professional land price management system and we cannot get rid of risks caused by unreal prices written in land transaction contracts.

The revised Land Law should clearly state that land taxes will be calculated in accordance with the list of land prices introduced by the provincial People's Committee and they will not be based on the prices written in land transaction contracts, and the Ministry of Finance will be in charge of introducing the concerned guidelines. The management agencies and the press should help raise people's awareness in providing the actual prices in land transaction contracts to avoid risks of legal problems. For example, when a contract is declared to be null and void and the party that has received the money has to pay back the amount written in the contract, or when a land price management agency, based on the price written in a contract, decides on compensation when the State revokes the concerned plot of land for government purposes.

Additionally, the government land price frame and the provincial People's Committee land price list is still remarkably lower than the market price (only about 30%), although the Land Law states that the land price decided by the State must be in line with the land price in the market. The main reason is that provincial authorities still worry about the price being too high for civilians. This approach should be changed so that all legal regulations become practical. If the tax rates and fees are high, it is necessary to reduce the tax rate rather than the land price.

The government frame of land prices actually has not played a positive role in management of land prices over the past years. The role of the land price frame should be replaced with a national land price determination agency or a national land price assessment council. This central agency can issue final decisions on land prices and land price management, such as settlement of disputes over land prices and decisions on land price determination methods.

It is proposed that the Land Law cancel the government land price frame and replace it with a national land price determination agency or the national land price assessment council. Fines should be imposed on provinces that introduce land prices which are lower than the average price in the market. The provinces' issuance of land price lists should be strictly controlled, and the Ministry of Natural Resources and Environment should provide specific guidelines on the methods of determination of prices in making the land price list.

The progressive rate of land use tax should be high enough to have a positive effect on cases in which people have land but do not use it, or they do not use it for the right purpose, or do not use it effectively in order to reap maximum benefit from the land. Progressive tax rate should be applied to cases in which people receive a transfer of land and then transfer it to another person within a short span of time.
It is vital to review the five methods of price determination introduced by the government because the fifth method is inappropriate. This method contains a part that says that the specific price of a land plot is determined by multiplying the land price applicable in the land price list by a chosen coefficient. This method is not based on any scientific grounds, because it is impossible to determine the price of a specific land plot based on the result of determination of lots of prices; and neither can this method be found in any book on land price determination methods, nor can it be found in the international, regional or Vietnamese technical standards for price determination. Besides, this land pricing method is pulling us back 20 years when the 1993 Land Law was applicable.

Reforming land tax system

Vietnam's land and real property tax system is considered ineffective, resulting in very low land revenues; and taxes cannot be a tool to control the market. From experience of industrialized countries, land use taxes make up a high percentage of the local revenue and are the main source for development of infrastructure and public services, hence these must be high. In contrast, the tax on real property use right is low in order to encourage official transactions.

The taxes on land and real property need to be reformed in this direction. In addition, the tax system must play the role of policies that control development, including prevention of speculation of real property (including land) in the form that land is available but not being used. For instance, the land owners do not use the land, or they keep the land but put little investment in the land and do not use the land effectively. It is necessary to arrange civilians according to their income and those who can afford payable taxes. This can also help control the flow of workers migrating to urban areas.

High real property taxes will reduce the price of real property, creating opportunities for increased competitiveness in the economy and make it possible for low and middle-income groups to access appropriate housing. Moreover, the taxes on non-agricultural land must play the role of obtaining increased land value which does not come from the investment of land users, but from the tax on increased land value.

Furthermore, the taxes on transfer of land use rights plays the role of preventing high prices of land in local areas which happens during urbanization, such as formation of new economic areas or changing a suburban district into an urban zone. Progressive tax rates should be applied to cases in which people receive a transfer of land and then transfer it to another person within a short period. When taxes are imposed on real property with land use rights, it is necessary to consider exemption or reduce the value added tax on real property in order to avoid double taxation.

Also, it is important to consider reducing taxes and fees for all transactions of real property in rural areas, especially taxes and duties on change of agricultural land use rights, in order to increase official transactions of real property in rural areas and encourage the process of accumulation and concentration of agricultural land.

Another task is to create favorable conditions for increasing revenue for budgets, causing urban areas to upgrade by using their own revenue and accelerating urbanization more effectively. In this way, it will help to totally reform the Land Law for use of agricultural land by gradually increasing the current basic tax rate of 0.03% to 1% on land value, based on the land prices set by the State in line with market prices.

Translated by Nguyễn Gia

Dr. Đặng Hùng Võ

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