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Chapter VII
Revenue Assignment between the Central and Local Budgets in Vietnam
Chapter VII.
Revenue Assignment between the Central and Local Budgets in Vietnam 219

Kiyohito Hanai* and Bach Thi Minh Huyen ** 1. Introduction The fiscal management of local budgets in Vietnam was highly centralized before the implementation of the State Budget Laws. Revenues for local governments were given by central government and local discretions were limited in implementing their expenditure delivery, with the central government controlling both current and capital local expenditure. Basic norms were also set by the central government in implementing local expenditures. The lack of transparency and incentives of local governments were issues to be solved in central local budgetary relations. The establishment of the 1996 State Budget Law in Vietnam has challenged fiscal decentralization to improve the efficiency and equity in the operation of the public sector. The implementation of the 1996 State Budget Law and its subsequent reforms have enabled local budgets to share responsibilities, in terms of both revenue and expenditure allocations, with central government. The approval of the new State Budget Law in 2002 further advances fiscal decentralization, especially by assigning more authoritative responsibilities to provincial government and also by guaranteeing revenue sources to commune governments, whose administrative activities are the closest to residents' lives. The paper examines the progress of State Budget Laws and the current fiscal status of revenue mobilization of local Vietnam budgets. By clarifying the unsolved tasks of the State Budget Law 2002, which can be identified as a necessity to improve the revenue adequacy of local budgets, the paper explores a means of reform to allocate efficient and stable revenues for local budgets in the progress of the socialist oriented market economy. In the central-local budgetary relations in Vietnam, the vertical structure of government and hierarchical budgetary management is a dominant feature. There has been considerable progress in establishing autonomy and discretions of provincial governments in managing local budgets, thanks to the establishment of the new State Budget Law in 2002. However, vertical supervision, such as a hierarchical reporting process and dual subordination is still prevalent in expenditure delivery and administrative relationships at all levels of government. A similar vertical government structure is also evident in the financing of local budgets. All taxes are stipulated as national taxes and local discretions to establish ones own funding resources are strictly limited in Vietnam. Shared revenues and intergovernmental supplementary allocations etc. play important roles in financing local budgets. With this in mind, the revenue mobilization of local budgets in Vietnam should be examined by synchronizing the relationship between the central budget and budgets.
Kiyohito Hanai is Professor at Faculty of Economics, Seijo University. Bach Thi Minh Huyen is Deputy General Director at Tax Policy Department, Ministry of Finance, Vietnam.
**
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We tackle the issues of revenue mobilization of local budgets in Vietnam through the following three steps. Firstly, we study the progress of the State Budget Laws and set out the emerging feature of fiscal decentralization in local budget management. Secondly, we examine the revenue assignment of local budgets and investigate the current fiscal status of central-local budgetary relations. The study clarifies that a vertical fiscal imbalance is a dominant feature in central-local budgetary relations in Vietnam. The imbalance is evident in characteristics such as poor tax revenue entirely allocated to local budgets and also in the heavy dependence on shared tax revenues, and intergovernmental financial transfers from higher level governments etc. However, a vertical fiscal imbalance in central-local budgetary relations is a common feature in most countries with differing governance structures and developmental stages in the Asia-Pacific region, including in Japan (a unitary and developed country), Australia (a federal and developed country) and Indonesia (a developing country) etc. Thus examining international perspectives and lessons on revenue assignment will be useful to consider the revenue strategies of local budgets in Vietnam to address its vertical fiscal imbalance. Thirdly, we explore the revenue strategy of Vietnam to finance local budgets in adequate and efficient ways, based on international perspectives. We recommend the following revenue strategies: (1) Expanding tax revenue, which enables local commitments, and above all, by strengthening land related taxes, which is important for local budgets. (2) Efficiency should be improved in the mechanism of allocating shared VAT and CIT revenues. Good tax collection and the efficient allocation thereof will coincide with the growth of regional economies, which will contribute to the growth of respective revenues. (3) The equalization scheme of supplementary allocations should be simplified and transparent. Improving the equalization formula will lead to the efficient and equitable fiscal management of local governments. Revenue strategies of local budgets in Vietnam should preserve emerging market mechanisms, which will improve the efficiency and revenue adequacy of local budget management. 2. Historical Development of State Budget Laws in Vietnam 2.1. Fiscal Decentralization in Vietnam Prior to the Introduction of the State Budget Law Fiscal decentralization in Vietnam has had a long history of development1. The first legal document on decentralization of the State budget was the Decree 168/CP dated October 26, 1961 of the Minister's Council. In 1967, the Government issued the Decree 119/CP, providing temporary guidelines on decentralization of fiscal powers and responsibilities to provincial Governments. Under this framework, provincial
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Fiscal decentralization can be defined as the assignment of responsibilities and powers, as well as benefits, among different levels of administration regarding the management and execution of the State budget.
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administrations were assigned the power to prepare and manage their own budget. In other words, each province and city had its own budget, which at the time was known as a local budget. The local budget was recognized as part of the overall State budget system and was developed and managed by the local authorities. However, for various reasons, during this period, local authorities merely acted as budget utilizing units and did not take on the full role of an independent budgetary level. All revenue collected was transferred to the central budget, which, in turn decided all expenditure made from the State budget. Regarding the communal budget, in accordance with the Decree 64/CP dated April 8, 1967 of the Ministers Council; the communal budget was defined as a budget collection and expenditure plan of the communal authorities. The objective of this plan was to ensure that there were sufficient resources to finance the operation of the People Committee and People Council at a communal level. Therefore, communal authorities had their own budgets during this period. However, their budgets were not taken into account when the overall State budget was consolidated. To meet the requirements arising from the process of national socio-economic development, several resolutions and decrees were enacted by the Government in subsequent years, aiming to amend and supplement the regulations on budget decentralization. On November 19, 1983, the Ministers Council issued the Resolution 138/HDBT, reforming the fiscal decentralization regime to the local authorities. Following these regulations, the budget system was divided into four levels, namely: central, provincial, district and communal budgets respectively. The Government also issued a Resolution 186/HDBT, dated November 27, 1999, and a Decision 168/HDBT, dated May 16, 1992, by which the State budget was managed in accordance with the principle that power to decide on major and critical issues of the budget was vested with the National Assembly, with overall responsibility for execution granted to the Minister Council. This regulation was designed to ensure unified management of the State budget. In addition, regulations governing the assignment of expenditure responsibilities and revenue sources between central and provincial budgets, as well as a revenue sharing mechanism between these budgetary levels, were also adjusted to meet changing needs. The revenue sharing ratio among different budgetary levels was applied consistently nationwide and reviewed on an annual basis. Therefore, it can be seen that prior to the enactment of the State budget law, fiscal decentralization in Vietnam had helped establish a clear distinction on the responsibilities and powers of different budgetary levels and, to some extent, contributed to increasing financial autonomy for local authorities. However, the decentralization objective was not fully realized. Legal framework on fiscal decentralization was limited to that issued by the Government and lagged behind the needs of the economic development process. This reality posed a number of difficulties for various Government agencies in fulfilling their operational responsibilities. 2.2. Budget Decentralization Under the 1996s State Budget Law The State budget law was approved by the National Assembly on March 20, 1996, with the objective of overcoming the limitations of the previous institutional arrangements in decentralizing budget management power among different level of administrations. This was the first budget law in Vietnam and one of the most important regulations in the area of budgetary and fiscal management. The enactment of this law
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marked an important turning point in management of the State budget in Vietnam, providing the highest legal framework for the management of the State budget. This Law has also helped to strengthen the role of the State budget in the process of socio-economic development. 1996s State budget law comprises includes the following points. Firstly, the law stipulates the budget system in Vietnam, consisting of central, provincial, district and communal budgets. The central budget performs the main role in the budgetary system, providing financial resources for Government and its central agencies to ensure the achievement of key national development objectives. The budget of the local administrations, meanwhile, is responsible for the provision of financial resources for the operation of the local Peoples Council and People Committee, as well as other agencies at local levels. Revenue sources and expenditure responsibilities of the local administration are defined in the State budget law in accordance with the decentralization of social and economic management tasks. Secondly, the law clearly defined basic budget-balance principles. These latter basically enforce the State budget balance, shown by the following condition whereby total revenue from taxes, fees and charges must exceed total recurrent expenditure and the level of budget deficit must be lower than investment expenditure. In addition, the pace of increase in investment expenditure must be higher than that of recurrent expenditure. The issue of money for funding any budget deficit is not allowed under State budget law. As for the local budget, expenditures must not exceed total revenues and the speed of the increase in investment expenditure must be greater than that of current expenditure. In other words, local budgets are not allowed to go into deficit. These basic principles have contributed to restructuring and increasing the financial health of the State budget. Thirdly, the State budget law has clearly determined the responsibilities and powers of various agencies in the administrative system, from central to local level, in the preparation, allocation, execution and settlement of the State budget. The local Peoples committee decides the budget estimates and approves the budget settlement of the local administration. The Government is responsible for the overall management of the State budget while the Peoples committee is responsible for that of local budgets. Ministries, and central and local agencies under the management of local Peoples committees are regarded as advisory agencies in the management of the State budget. It is worth noting that the decentralization of power among different administration levels involves very important and sensitive issues because, in practice, this is the division of one of the most important national financial resources. Fourthly, the State budget law assigned revenue sources and budgetary expenditure responsibilities of the various administration levels. The guiding principle in this aspect was that the Central budget should play the main role in the State budget system, providing financial resources to implement strategic and important social and economic tasks nationwide. The budget of the local administrations is allocated with a number of revenue sources to finance the assigned socio-economic development tasks at local levels. The assignment of revenue sources among different administration levels is clearly defined in the State budget law, in conjunction with the responsibility to effectively exploit and expand the revenue sources of these administration levels. The law has also decentralized the expenditure responsibilities on the basis of socio-economic development tasks. Another feature of the existing State budget law is
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that the level of revenue and expenditure assignment for local administrations is maintained at a constant level for a period of three to five years. This creates opportunities for local authorities to plan and manage their local budgets independently and helps them mobilize resources more effectively. This regulation helps to overcome the issue of instability of the previous budget system. This instability was considered to be one of the key reasons for previously poor management of the State budget and prompted the local budget to rely on the Central budget for their funding needs. The mechanism of the assignment of revenue sources, expenditure responsibilities between the central and provincial budgets and between the provincial budget and other levels of local budgets has basically been adjusted in comparison with the period before the State budget law came into force. The overall objective of these adjustments is to increase the level of autonomy for local agencies in terms of revenue collection and expenditure responsibilities. Since the State budget law was imposed, most issues and limitations associated with managing the State budget, arising in the period before the law came into force (assignment of responsibilities for managing the State budget prior to the enactment of the law on the State budget being evaluated as unstable and unequal) have been effectively corrected through two new regulations, through which revenue sources and expenditure responsibilities allocated to government agencies at all administration levels are maintained at constant levels in accordance with the provisions of the State budget law, meaning the percentages of revenue adjusted and supplemented to local budgets shall remain constant for a period of 3 or 5 years. Maintaining stable revenue sources for a specified period of time is a very important initiative of the State budget law, which creates opportunities for local authorities at various levels to plan and manage their local budgets independently. Fifthly, the approach for monitoring and examining revenue collection and expenditure has also been subject to various changes. According to the provision of the State budget law, the tax authorities are responsible for informing taxpayers of the amount of tax liability. Upon receiving tax payment notification, the taxpayers will make the payments directly into the State budget. The budget managers, utilizing units based on approved budget estimates and other regulations of the State budget law, issue spending approval orders. The State treasury agencies are then responsible for examining the legality of the supporting documents before issuing payment. 2.3. The State Budget Law (Amended in 1998) On May 20, 1998, the Law on the State Budget was amended and supplemented by the National Assembly. The major reason triggering this amendment of the State budget law in 1998 was the wish to support the introduction of two new tax laws, which were effective from January 1st, 1999. These two laws were the Value Added Tax and Corporate Income Tax laws. The amended law on the State budget reduced the number of revenue sources, from which the central budget was entitled to enjoy 100% of the amount collected, as well as adjusting the revenue sources and expenditure responsibilities of the local budget, of which revenue from agricultural land use and natural resource taxes (except
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for natural resources imposed on crude oils) were retained 100% at the local budget level. Under the previous regulations, these revenue sources were shared between the central and local budgets. Further revenue sources and expenditure responsibilities were assigned to the local authorities, especially for the district budget and urban authorities (including both shared and unshared sources of revenue). This amendment was made in order to support and encourage local authorities in exploiting their potentially available resources. In addition to the above two sources of revenue, the local budget was also now entitled to revenue from excise tax imposed on domestic goods and services, such as pubs and karaoke, massage, golf, casino, jackpot. This source of revenue was previously entirely assigned to the central budget. 2.4. Budget Decentralization Under the 2002s State Budget Law The State budget law was enacted and put in effect from 1997 onwards. Up to 2002, the performance of the State budget had improved remarkably and made significant contributions to the national economic development process. This law also helped to strengthen the scope and health of the State budget. Within the period 1997-2001, annual revenue collection had exceeded recurrent expenditures and part of the revenue was used to cover capital expenditure and meet debt repayment obligations. Budget expenditures were made in a positive manner and the level of contingency budget was maintained adequately at both central and provincial levels to finance unexpected requirements, such as these arising from natural disasters. In addition, all debt repayment obligations were fulfilled in accordance with their schedule. The management of the State budget has become more effective and standardized. The responsibilities and powers of various Government agencies at different levels in the management and execution of the budgetary system, to some extent, have been clearly defined, while the overall position of central and local budgets has also been adequately maintained. Revenues from the taxes and fees exceeded recurrent expenditures and debt repayment obligations, while the level of budget deficit was maintained to within an acceptable range. A number of detailed regulations concerning expenditure norms and standards were issued by the Government in conjunction with the introduction of a budget expenditure monitoring and controlling mechanism through the State treasury system. Budget disclosure and transparent practice was also adopted. These facts had contributed to maintain the overall effectiveness and efficiency of the budget execution. The State Budget Law was once again amended and supplemented in 2002 to overcome issues and limitations such as: (1) Poor growth in productivity and a large degree of tax avoidance and invasion etc., (2) Overlap of responsibility of powers between the National Assembly, the Government, and provincial Peoples Council and People Committees in managing State budgets, (3) The limited role of the provincial administration in budget preparation and execution, (4) Mismatching between local revenue collection power and local expenditure responsibility and (5) The functioning of bonus mechanisms etc.
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This amendment also helped ensure that the provisions of the State budget law remained consistent with the amendment of the National Constitution in 2001 and the provisions of the Law on the organization of the National Assembly and the Law on the organization of the Government. With this amendment, local administrations, central agencies and budget utilizing units became decentralized and gained additional powers in terms of budget management. The amended State budget law was effective from the fiscal year of 2004 onwards and replaced the 1996 State budget law and its subsequent amendment in 1998. 3. Analysis of the Current System 3.1. Fiscal Status of Local Budgets and Their Revenue Mobilization Currently, the government structure in Vietnam consists of four levels of government: central government, provinces, districts, and communes. There were 64 provinces (3 new provinces were created in 2003), 611 districts and 10,602 communes in Vietnam in the year 2004 (World Bank 2004a). The State budget comprises the central and local budgets, with the latter comprising provincial, district, and commune budgets respectively. The dominant feature of the budgetary system in Vietnam is in its vertical structure, whereas a hierarchical relationship can be seen in the accountability and reporting system of local budgets. The 'Matrouchka doll' model is widely used to describe the Vietnamese vertical structure of budgetary management (World Bank 2004a and Ebel and Taliercio 2004). Local officials are accountable to the upper level government as well as to the jurisdictional People's Council. Budget approval is necessary from the upper level of government, as well as the jurisdictional Peoples Council, for its implementation. Eventually all sub-national budgets get consolidated into the State Budget. The supervisory role of budgetary management is taken by the National Assembly in the last result2. The establishment of the State Budget Law 2002 has strengthened the autonomy and discretionary responsibilities of provincial governments in managing local budgets, while vertical supervision, such as the hierarchical reporting process and dual subordination, remains prevalent in expenditure delivery and administrative implementations at all levels of government3.
The State budget law 2002 provides the powers of the National Assembly in the area of State budget management, such as deciding budget estimates; making budget allocations and approving a final budget settlement. The power to approve the detailed budget estimates for central ministries and agencies and the power to decide on the level of supplemented allocations from the central budget to the provincial budget is also assigned to the National Assembly. The Standing Committee of National Assembly has the power to decide what percentage of revenue should be shared between the central and local budgets, to raise comments on key allocation norms, which have had wide and significant impacts on socio-economic development and national defense, and to supervise the utilization of the revenue in excess of the targeted plan. 3 The State budget law 2002 provides local Peoples Committees with powers to decide local budget estimates; in making budget allocations within their regions and budget expenditure estimates for the local departments and agencies and to stipulate the percentage of revenue to be shared between the provincial budget and those at district and commune budgets. The local People councils are also responsible for the approval of their own budget settlement.
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This kind of vertical government structure can similarly be seen in the revenue raising mechanism of local budgets in Vietnam. All taxes are defined as national taxes and the local discretion of local governments to establish their own funding resources are strictly limited. The central government decides tax bases as well as tax rates of all items of tax sources. Tax administration and its enforcement are basically carried out by the General Department of Taxation (GTD) and revenue collection of taxes on international trades is the responsibility of the customs department. The assignment of tax and shared revenues, especially the offering of substantial revenues to local budgets, and intergovernmental supplementary allocations, play important roles in mobilizing local revenues. Thus, the revenue mobilization of local budgets in Vietnam should be examined by synchronizing the relationship between central and local budgets. The State Budget Law 2002 assigns the following revenue resources between central and local budgets. The list of revenue resources is shown in Table 3.1. The tax revenues of which 100 percent is assigned to the central government include export tax and import duty, value added tax (VAT) and excise tax on imported goods; corporate income tax on corporations implementing a uniform accounting system; tax and other revenue from crude oil; proceeds collected from government lending and capital contributions etc. Shared taxes between the central and provincial governments include all VAT, except that on imported goods; corporate income tax, except that on imported goods; income tax on high income earners; profit remittance tax (which was abolished in January 2004.); excise tax on domestic goods and services; and petroleum fees. Two revenue sources, including the excise tax on domestic goods and services; and petroleum fees were added to the list of sharable taxes under the State Budget Law 2002. The shared tax rates are uniform for all shared taxes for each province and can differ by province. These rates are calculated as part of the budgetary process at the start of each stability period of at least three years (Martinez-Vazquez 2005). The tax revenues assigned 100 percent to the local government level include housing and land tax; natural resources tax (except that on crude oil); license tax; land transfer tax; agricultural land use tax; land use fees; rental of land; proceeds from the sale and lease of State own houses and buildings; and registration fees; proceeds from lottery activity and other fees and charges. In the revenue collection of regional taxation office, the followingbonus mechanism is prepared on excess revenue collection. The State budget law 2002 specified that should the actual revenue collection of shared tax exceed the targeted plan, the government could allocate up to 30% of the excess revenue to the provincial budget to invest in infrastructure development and other expenditure responsibilities. However, this amount must not exceed the difference between the actual and planned budget collections of the previous years. Transfers (supplementary allocations) are offered from higher tier to lower tier budgets. These have made up the revenue shortages in local expenditure (in other words, gap filling) and their allocation was previously based on ad hoc negotiation among stakeholders (World Bank 2004a and Rao 2003). Progress can be seen in the reform of the transfer system as part of recent decentralization reforms in Vietnam. Two types of transfers, such as equalization and conditional transfers, are established by identifying their different policy strategies under the State Budget Law 2002.
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As equalization grants, budget balanced supplementing allocations are designed to help allow local administrations to access sufficient funding sources to finance their social and development objectives and national defense. This supplemented allocation is identified based on a 'formula' by taking account of differences in revenue and expenditure in accordance with the provisions of the State budget law and based on other criteria such as the size of the population, natural characteristics and the socio-economic development of each region. In calculating the amount of supplemental allocation, special attention will also be paid to mountainous and remote areas. A stabilization period of three years is prepared for the provision of equalization transfers. However, schemes of equalization transfers in the relationship between Provincial and other local budgets are not well established yet (World Bank 2004a). As conditional grants, targeted supplementing allocations are designed to support the local administrations in implementing development programs and projects considered critical to their social and economic development. With these targeted allocations, it is expected that difficult regions will be able to catch up with the development of their peers, as well as helping to ensure there are sufficient funds to finance unexpected requirements, such as natural disasters, hunger alleviation, etc. Regarding local borrowing, local budgets shall be balanced on principle and only provincial governments may borrow in the domestic market. Funds from borrowing should be used for capital expenditure, but are beyond the balance capability of the provincial budgets in the estimation year. Activities funded by borrowing should be based on the Provincial 5 year plans being approved by the provincial People's council. The debit balance from the mobilized capital source must not exceed 30% of the provincial budget's annual investment capital for domestic capital construction. As for the communal budget, the State budget law 2002 provided that the communes are entitled to enjoy at least 70% of the following: agricultural land use tax imposed on households (in excess of the specified threshold), land use right transfer tax, land registration fees, and housing and licensing taxes collected from individuals and households among the revenue sources allocated by the provincial council. Table 3.2 shows the current fiscal status of the State budget, comprising the central and local budgets for FY 2005. The total expenditure (including transfers to local budgets) of the central government is 169.2 trillion dong, and its expenditure excluding transfer to local budgets is 129.0 trillion dong. The total expenditure of local budgets is 100.7 trillion dong. Central budget revenue consists of tax revenue and fees, ODA and whatever is carried over from the previous year. Its revenue size is 128.5 trillion dong, hence the central budget is 40.8 trillion dong in deficit. Local budget revenue is 100.7 trillion dong, with no deficit finance. The fiscal volume of the central expenditure is about 1.3 times larger than that of local budgets. Table 3.3 shows the scope of the revenue of the central and local budgets, showing their revenue shares of the State Budget since 1991. There was significant fluctuation in the scope of local budget revenue prior to the enactment of the State budget law. It can also be seen that the revenue source allocated to local budget decreased on average as a percentage of total revenue collected. The implementation of the State Budget Laws contributed to stabilize local budget revenue. However, satisfying revenue adequacy remains one of the important unfinished tasks of the State
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budget laws in Vietnam4. The revenue share of local budget was an average of 33.25% for 1997-2000. Revenue adequacy should be guaranteed if we take account of the facts that local budgets convey various important capital expenditures and recurrent expenditures such as education, health, culture and economic services etc. (Tables 3.4 and 3.5). Tables 3.6 - 3.8 examine the current revenue status of local budgets in Vietnam, taking account of regional differences in 2003. Revenue sources are grouped into (1) revenues from taxes, fees and charges, (2) assistances from higher budget level, (3) borrowing and (4) other revenues. Respective budgets of provinces, districts, and communes are examined; and district and commune budgets are subtotaled at a provincial Level. Table 3.6 shows the revenue and expenditure structure of provincial budgets. The percentage in the left-hand column shows the revenue (expenditure) shares of respective revenue (expenditure) items as part of total budgetary revenue (expenditure). The figures in the table represent the number of provinces belonging to corresponding share levels. Regarding revenues from taxes, fees and charges, only 6 Provinces of 33 were able to finance over 50% of total budgetary revenue. Nearly half the provinces (17 of 33) were only able to finance less than 30% of total budget revenue, based on revenues from taxes, fees and charges. Poor revenue raising situations from taxes, fees and charges, on the other hand, indicates that provincial budgets are heavily dependent on other sources of revenue, such as assistance from higher budget levels etc. 28 out of 33 provinces (nearly 85%) depend on assistances from higher budget levels for over 50% of total revenue. Regarding borrowing, only 2 provinces can finance 10-30% of their budget revenue. As with provincial budgets, both district and commune budgets are heavily dependent on assistances from higher budgets. In terms of expenditure management, the provincial budget deals with current expenditure, such as education and health, as well as capital expenditures. Moreover, 28 of 33 provinces allocate more than 30% of their expenditure for capital expenditure. Tables 3.7 and 3.8 show the revenue structure of district and commune budgets respectively. In common with provincial budgets, revenue shares of taxes, fees and charges in terms of the total revenues of districts and communes are very small. In district budgets, no provincially aggregated units could finance over 50% of total budgets by revenues from taxes, fees and charges (Table 3.7). In commune budgets, a similarly poor financing situation through taxes, fees and charges is observed (Table 3.8).
There are also unfinished tasks of the State budget laws, seen in the duplication and overlapping of administrative tasks among different levels of government. Good coordination is necessary under the intricate administrative relationship among provinces, districts and communes. The State Budget Law 2002 addressed the decentralization of discretionary powers to provinces and strengthened the financial sources of districts and commune. However, no clear distinction is given in the law between the role of districts and commune budgets. Thus, functional responsibilities and revenue assignment of district budgets are not straightforward under the fiscal decentralized strategy in Vietnam.
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Tables 3.9 - 3.11 compare revenue composition of respective tax sources (VAT, CIT, PIT, land-related tax) in provincial, district and commune revenue collections. Table 3.9 shows the tax revenue composition in provincial level. VAT and CIT revenues play important roles in the provincial Budget. However, not all provinces can enjoy their revenue sources. Only 5 provinces can collect 30-50% of total revenues from taxes, fees and charges from VAT. Most of the other provinces (23 of 28) see a final revenue share of around 10-30%. Similar results can be observed in CIT revenue collection, where only 1 province could collect 30-50% of total revenues from taxes, fees and charges. In most provinces (27 of 38), the revenue share of CIT was less than 10%. Regarding PIT collection, its revenue share was also less than 10% in all provinces. The table also shows that the share of tax revenue from land related taxes, fees and charges; of which 100% of the revenue goes to local budgets, is very small in most provinces. 33 of 38 provinces collecting less than 10% of tax revenues etc. from land related taxes, fees and charges. Revenue collection from VAT, CIT and PIT becomes very small in district and commune budgets (Tables 3.10 and 3.11), but in contrast, revenues from land related taxes fees and charges become important for them. 3 aggregated provincial units (in the case of commune budgets) and 2 aggregated provincial units (in the case of district budgets) can collect over 50% of total revenues from land related taxes, fees and charges. However, most of the other aggregated provincial units, both in district and commune budgets, achieve results of less than 10%. Table 3.12 shows the regional diversity of tax collection, expenditure delivery and the allocation of supplementary grants in Vietnam. The columns in the Table show per capita tax revenue in the locality, per capita transfers, and per capita provincial expenditures for FY 2000 (settled). The table also shows the rates of retaining shared tax revenues in local budgets for FY 2000 (settled) and FY 2005 (budget), and the average growth rate of regional GDP for the period 1997-2001 (a 5 year average). Shared tax revenues and supplementary allocation from higher level governments play important roles in addressing the revenue adequacy of local budgets and alleviating revenue disparities arising in Vietnamese tax collections. The coefficient of variation (COV) of per capita revenue collection among the provinces in FY 2000 was 1.77, indicating that a wide disparity of revenue collection is prevalent among provinces. On the other hand, the coefficient of variation (COV) of per capita expenditure delivery through local budgets in FY 2000 was 0.36. Both shared taxes and supplementary allocation from the central budget to local budgets contribute to alleviating the revenue disparity of local budgets. Under the decentralization of the 1996 State budget law, 56 of 61 provinces were unable to balance their own budgets and had to rely on supplemental allocations from the central budget. Of these, 25 provinces and cities needed to be supplemented from 70% to 94%, as compared to their revenue; 16 provinces needed supplementing from 50% to 69%; 10 provinces needed supplementing by 30% and 5 provinces needed supplementing by 20%. The promotion of fiscal decentralization under the State Budget Law 2002, by adding two resources, such as special consumption tax and oil fees into shared revenues etc, improved the situation and 15 provinces are expected to achieve a revenue balance for FY 2005. Comparable budgetary data was obtained by fieldwork research in the Thai Binh and Ninh Thuan provinces for FY 2003. Table 3.13 shows the budget consolidations at province, district and commune levels in both provinces. In terms of local expenditure
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management, current expenditure becomes the major component of expenditure in all local budgets (except Ninh Thuan province at a provincial level). In terms of revenue composition, small shares of land related taxes are evident in all local budgets of both provinces. As regards the provincial budget however, the share of land related taxes is less than 1% in both provinces and its shares are also low in the district and commune budgets of both provinces, recording less than 2%. Even if we add land using revenue, land water space rental revenue and land related taxes, the revenue source could finance only 5.6% of total provincial revenue in Thai Binh Province. Thus, as seen in the nationwide revenue composition, all levels of budgets in both provinces are heavily dependent on assistance from the higher level budgets. Regarding revenue mobilization at commune levels, local fees and voluntary contributions are charged to finance bridges and school construction etc. in these provinces. Local fees and contributions should be managed on budgets to maintain transparency and accountability in commune budget management. In addition, a sufficient level of tax revenues should be prepared for all levels of local government without relying on irregular charges. The above empirical results show that local revenue mobilization in Vietnam has the following characteristics. Firstly, the revenue contribution of taxes, fees and charges is very small in financing all levels of local budgets. VAT and CIT revenues are mainly collected by tax administrators in provinces but not all provinces can enjoy their revenues. The revenue shares of VAT and CIT are small in district and commune revenues and the collection of PIT is also very small at all levels. Regarding land related tax revenue, local governments can enjoy 100% of its revenue in local budgets in Vietnam. However, its revenue share is very small at a provincial level. The limited revenue mobilizing capability of districts and communes from shared revenue shifts a relatively high share of land related tax revenue. Except for several cases, most districts and communes can finance less than 10% of revenue from land related taxes at aggregated levels. Secondly, a high dependence on assistance from higher tier governments is evident in local revenue mobilization. Such significant dependence on assistance from higher tier government indicates a gap between the size of the expenditure delivery and financing through tax revenues in local budgets. Thirdly, two revenue measures, such as shared tax revenues and supplemental allocations (equalization transfers and conditional grants) from higher level governments play important roles in improving the revenue adequacy of local budgets and alleviating revenue disparities in Vietnamese tax collections. Thus, the study here clarifies that a vertical fiscal imbalance is a dominant feature in central- local budgetary relations in Vietnam. The imbalance is obvious in such characteristics as poor tax revenue 100% assigned to local budgets and also in the heavy dependence on shared tax revenues, and intergovernmental financial transfers from higher level governments etc. However, a vertical fiscal imbalance in central-local budgetary relations is a common feature in most countries with different governance structures and at a developmental stage in the Asia-Pacific Region. With this in mind, it will be useful for Vietnam to examine international lessons in addressing the vertical fiscal imbalance.
Chapter VII.
The following section discusses international perspectives of economic criteria in allocating adequate and efficient revenues for local budgets. Based on these criteria, we consider revenue strategies of local budgets, which are compatible with the growth of the market economy under socialist orientation in Vietnam. 3.2. International Lessons of Mobilizing Revenue for Local Budgets In most countries financing simply through own revenue (local taxes) is insufficient to address local budgets. We examined the revenue composition of different tiers of government in Japan, Australia and Indonesia, having a different governance structure of central (federal) local (State and local) governments, and different developmental stages. Japan represents a unitary nation with two tiers of local governments: prefectures and municipalities. The share of local tax revenue as part of total local revenue (both prefectures and municipalities) is 34.4% for FY20025. Intergovernmental transfers play an important role, contributing 21.0% in terms of general purpose payments and 13.5% for specific purpose payments. Australia represents a federation with two tiers of sub-national governments: States and local governments. State tax revenues make up 31.9% of total State revenue and the share for local government is 37.6%6. Sub-national governments in Australia also depend on intergovernmental transfers. The share of current grants and subsidies as a percentage of total State revenue is 46.4% and that for local governments is 11.5%. A similar vertical gap can be seen in developing nations like Indonesia (Simanjuntak and Mahi 2003). The percentage share of local tax of total local revenue in Indonesia is 14.4% for 2001. The extent of revenue sharing between the central and local governments represents total local revenue of 18.8%, its share of general purpose grants (DAU) is 56.4% and its share of specific purpose grants (DKI) is 0.07%. Significant dependency of local revenue on general purpose grants can be observed in Indonesia. Thus, exploring a rationale of revenue assignment for local budgets, such as local tax assignment, tax sharing arrangements, specific purpose grants, equalization grants and also local government borrowing is very important to support efficient and equitable management of local public finance. Thus, a vertical fiscal gap at different levels of government, between personal revenue and expenditure, is a prevalent feature, evident in a number of unitary and federal countries. Countries undergoing a developing process and those at a transitional stage also have this common feature. The following discussion explores principles for local budget revenue strategies from international perspectives. In particular, we examine the economic rationales of local tax assignment and tax sharing and also study the economic role of equalization grants. Firstly, in vertical tax issues, assigning appropriate taxes or tax revenue to a local budget is necessary, while centralizing all or most taxation powers to the central government is undesirable. If we consider that substantial amounts of public services are provided by sub-national governments, the centralization of taxation power breaks the link between the benefits of public expenditures and tax burdens and weakens the
5
Figures are from the White Paper on Local Public Finance (FY 2002 Settlement), Ministry of Internal Affairs and Communications, 2004 (in Japanese). 6 Figures are calculated on the basis of Government Finance Statistics, Australia, 2002/03 (5512.0).
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fiscal responsibility and accountability of sub-national governments. To maintain fiscal incentives of sub-national governments, assigning them with appropriate accountable revenue is desirable. Regarding the tax assignment among different tiers of government, international experience suggests that some taxes are better suited for local governments than others. International lessons provide a number of economic rationales of taxation in a federal setting (McLure 1983 and Ter-minassian 1997). Maintaining efficiency is often emphasized for the assignment of local taxes. This is because decentralizing tax systems can often interfere with the efficiency of nationwide economic integration. Commonly emphasized criteria are as follows: (1) Local taxes should be independent from national policy goals such as income redistribution objectives and economic stability. (2) The local tax base should exhibit low mobility between jurisdictions. (3) Benefit taxes and user charges are appropriate to local taxes. In addition to the aforementioned efficiency criteria, economic principles, such as national equity, administrative costs, and fiscal needs are important for developing countries (Boadway, Roberts, and Shah 1994). Thus, (1) Sub-national engagement in perverse redistributive policies, using both taxes and transfers, should be restrained. (2) Rules to allocate tax revenue among jurisdictions, restricting tax evasion and avoidance, will be required. (3) Revenue means should be matched as closely as possible to revenue needs. The normative implication of the international lessons of assigning sub-national taxes is shown in Table 3.14. International experience implies individual and corporation income tax, and most of the goods and services tax, including VAT management, should be assigned to central government. The best candidate for local tax is property tax. Judging from these criteria strengthening, land related taxes will be most desirable to expand the financing of local budgets. Exploring local taxes or sources for 100% tax revenue for local budget, however, is insufficient to satisfy the local government fiscal capacity. In contrast to substantial taxes and revenues being assigned to the central budget, relatively less progress has been made in assigning taxes local budgets to a sufficient extent to finance the growing expenditure needs of local budgets in many countries. Table 3.15 shows the distribution of different taxes within different levels of government. In financing local budgets, though there are exceptional cases, such as Belgium, France, Sweden, and Hungary, where property tax revenues are excluded, property tax is the most important revenue sources for local budgets in most industrial and developing countries. The table also informs us that most countries depend on revenue grants from other levels of government to finance local budgets.
Chapter VII.
We consider that strengthening the fiscal capacity of local governments does not imply giving them more locally-collected tax revenues. A mere increase in the figure of locally retained tax revenue would not contribute to raising sufficient revenue for them. Moreover, this line of reform could result in additional distortions to the nation's tax system. Here, we would like to stress the importance of synchronizing taxes of central and local budgets. Specifically, the revenue of local governments has to be linked with local economic activities so that it can only increase when their economies grow. With this linkage established, local public finance becomes compatible with the willingness and commitment of local governments to manage their economies better and to let them grow faster. A surtax system on the major national taxes, such as income tax (non-progressive), is widely used to finance local budgets from international perspectives. Local governments can piggyback extra rates on the stable national taxes using the same tax base. With the development of local taxes, a surtax system can be applied using the existing tax collection channel of the General Taxation Department, which will reduce administrative costs. A ceiling should be put on surcharge rates to limit the wide difference in surcharge rates among jurisdictions. The merit of a surtax system lies in guaranteeing stable revenue resources for local governments with fewer administration efforts. An alternative and more efficient way to equip local governments with revenue is to better exploit the shared revenue between central and local governments. We can expect benefits of tax sharing such as reduced tax competition among local governments, economies of scale in tax administration and collection, and the maintenance of revenue stability over the business cycle etc. However, there are also downsides of the tax sharing scheme, due to disadvantages such as a reduction in local autonomy and the breaking of the link between the benefits and costs of local public expenditure. A good candidate in sharing revenues between central and local budgets is VAT. Since VAT has a large tax base (potentially as wide as the private consumption of the country), it is, in general, the best source for revenue sharing. An additional reason for picking this tax for revenue sharing in Vietnam is that income-based taxes have not been well developed, and if these taxes are chosen, it will take more time and money to distribute them from central to local budgets than would VAT. Allocating part of VAT revenue to local budgets will also contribute to preserving the market mechanism. This is because the commitments of both the central and local governments in terms of revenue raising of VAT will activate both national and regional economies. In fact, governments also gain when the total amount of VAT is increased, thanks probably either to better administration of the tax, economic growth, or both. If we take account of variation in regional developmental levels and variable costs of implementing regional public services, a horizontal fiscal imbalance is evident in the form of differences in capacity to raise own revenues and different costs and fiscal needs to meet their required expenditure responsibilities. The development of fiscal measures, such as various sources of transfers, is necessary to fill such a gap. An international perspective may be adopted to design an appropriate system of intergovernmental transfers. The basic transfer mechanism can be grouped into revenue sharing schemes and specific purpose grants. An appropriate combination of general and specific purpose grants is necessary to achieve both
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efficiency and equity rationale. Economic theory assigns the functions of general purpose grants to address vertical imbalance between central and local budgets and to adjust horizontal imbalances among local budgets. The theory also assigns specific purpose grants to correct spillovers and to implement national goals through local expenditure. Revenue sharing transfers (Equalization grants) are commonly used to address vertical fiscal imbalance. At an aggregated level, a funding pool of appropriate volume is important to fulfill the expenditure and revenue gap of sub-national budgets. In allocating the funding pool, a tax-by tax basis approach is commonly used in applying various distribution coefficients among levels of government for each tax or on the entire national tax revenue. Setting the coefficients of a revenue sharing arrangement in law or in the constitution enables local budgets to guarantee a degree of predictability for revenues (Ter-Minassian 1997). As for specific purpose grants, those of both matching and non-matching types can be applied. With a matching specific grant, the recipient government must contribute a certain amount to projects or activities in order to receive funding from the donor government, while non-matching specific grants do not stipulate a local contribution. Matching specific grants sometimes accompany the fiscal accountability of local governments if their revenue resources are sufficient. However, the grants are often segmented and prone to inefficiency, reflecting slivered bureaucratic controls. To avoid such problems, block grants, with broad categories, and their loose definition are often used to expand the expenditure discretion of recipient local governments. Effective coordination of policies between central and local budgets, and offering good incentives of recipient governments, should be considered when providing specific purpose grants. Regarding the design of equalization and specific purpose grants, Bird and Smart (2002) set out the following principles of international lessons. These are: (1) Both general purpose and special purpose matching grants should be managed on the basis of rules. (2) The funding pool of general purpose grants should be set in a stable but flexible way. (3) The allocation of general purpose grants should take account of both need and capacity. The formula should be as simple, reliable, and transparent as possible. (4) Specific incentive features to encourage additional tax effort are not necessary, if the general purpose grants are designed properly and if some tax policy discretion is guaranteed for local governments. (5) On the use of general purpose grants, no conditions should be imposed. (6) Matching conditions according to the expenditure type and fiscal capacity of recipient government should vary in the provision of specific purpose grants. (7) In financing infrastructure by specific purpose grants, recipient governments should satisfy technical conditions, which ensure that money is properly spent.
Chapter VII.
(8) The management of local public finance of all local governments should follow standard procedures, to maintain adequate and current accounts, and be audited regularly and publicly. 4. Policy Recommendations for Mobilizing Revenues for Local Budgets in Vietnam Judging from international perspectives and the current fiscal status, the following three revenue strategies are possible to address vertical fiscal balance in central local budgetary relations in Vietnam. [Revenue Strategy 1] - strengthening tax revenue, which enables local commitments, especially land related taxes, to finance local budgets In order to improve the revenue adequacy of local budgets, both increasing tax rates and expanding tax bases of the existing taxes are necessary. Strengthening tax collection nationwide should be given top priority in Vietnam. As we have already studied in previous chapters, establishing well defined PIT and land related taxes are important. Increasing petty taxes or fees that are not revenue productive should be avoided. The expansion of these taxes often complicates administration and increases costs, which will work against the development of the economy. International perspectives indicate that assigning revenue from land related or property taxes to local budgets is most desirable to increase local revenue in the current tax system of Vietnam. These taxes have the least immobility of tax bases between jurisdictions, which enables local governments to finance local public goods in an efficient way. The assignment of these taxes as a major financial resource of local tax revenue is both appropriate and widely accepted in most countries. The current tax revenues from property and land taxes are, however, too small to finance the basic funding resources of local public goods in Vietnam. Increasing tax rates and expanding tax bases are desirable to increase the revenue from these taxes. The appropriateness of tax privileges and the methods of property and land assessment should be examined to expand tax bases. [Revenue Strategy 2] - Efficient management of shared tax revenue by rationalizing tax administration in the shared revenues of VAT, CIT, PIT International lessons also inform us that merely exploring local taxes is insufficient to raise revenue for local budgets increasing decentralized fiscal activities and their growth commitments. Shared taxes between central and local budgets become important revenue sources to fulfill the vertical fiscal imbalance between the central and local budgets. Regarding the allocation of shared revenue, local governments can retain 100% or part of revenue which is actually collected within their jurisdiction in Vietnam. Such commitments of local governments for tax collection administration are often described as 'dual subordination' in tax administration (World Bank 2004a and Ebel and Taliercio
236
2004). In other words, provincial and local governments can step in on the activities of tax administrators. The use of such original principles in collecting shared tax revenue is likely to cause distortions in economic activities, above all in VAT and CIT administration. With regard to the management of VAT collection, the collection and allocation of its revenue should be managed according to the destination principle7. The current management of VAT collection, which enables local governments to retain revenue where goods are produced, may result in an inefficient allocation of resources, such as unfair industry location, and have adverse effects on economic development. This is because local governments may offer preferential advantages for firms to enclose the businesses within their jurisdictions. If we use the origin principle in local VAT management, devices such as applying the same rate and establishing a clearing house to match the allocation of local VAT revenue with local consumption level are necessary. The allocation of VAT revenue should be collected by a centralized tax authority and its revenue sources should be allocated according to their economic activities. The Japanese management of local consumption tax (sub-national VAT) adopts a sort of clearing house system in allocating VAT revenue among local governments (prefecture) and the mechanism can be explained in the Appendix. Similarly, local governments' committing to the revenue retention of shared CIT revenue collection causes efficiency problems. Tax revenue is accumulated in provinces having much of the production. Judging from the accumulation of enterprises registering and setting headquarters in rich and industrialized areas, this will provide an unfair allocation of revenue to finance local public services. Thus, shared revenue should not be allocated on the basis of the origin principle but rather on the basis of the destination principle. To avoid efficiency problems, devices such as (1) centralizing the revenue collection of shared revenues and the management of its fund, (2) adopting appropriate devices in the allocation of revenues among local budgets, based on the destination principle. [Revenue Strategy 3] - Establishing and simplifying formula for equalization grants The unsolved issues in the transfers scheme in Vietnam include two channels of the equalization scheme, such as the involvement of the National Assembly in deciding revenue sharing rates and formulas offering equalization grants. Thus, simplification of the current equalization scheme is necessary. The equalization scheme in Vietnam is managed according to a two track scheme, involving the adjustment of shared tax ratios by the National assembly and the provision of supplementary allocations. Judging from an international perspective, minimizing commitments in terms of the National assembly involvements in equalization adjustment, and establishing more transparent and objective formula are desirable in the management of equalization grants.
Conceptually, there are two types of principles in treating VAT inter-jurisdictional trade: destination and origin principles. VAT is charged on imports, but not on exports in the destination principle. On the contrary, VAT is imposed on exports, but not on imports under the origin principle. Lessons in handling VAT in international trade indicate that the destination principle is efficient and should be adopted.
Chapter VII.
Thus, we recommend the following revenue strategies: (1) Expanding tax revenue and enabling local commitment, mean that above all, strengthening land related taxes is important for local budgets. (2) Efficiency should be improved in the mechanism of allocating shared VAT and CIT revenues. Effective tax collection and its efficient allocation will be compatible with the growth of regional economies, which will contribute to the growth of respective revenues. (3) The equalization scheme of supplementary allocations should be simplified and transparent. Improving the equalization formula will lead to the efficient and equitable fiscal management of local governments. Revenue strategies of local budgets in Vietnam should preserve the emerging market mechanisms, which will improve the efficiency and revenue adequacy of local budget management.
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Appendix: Japanese Experience in Utilizing VAT Revenue between the Central and Local Budgets: Consumption Tax and Local Consumption Tax VAT revenue is shared both the central and local budgets in Japan. Consumption tax (VAT in Japan) was introduced in 1989 to explore efficient measures of imposing taxes on consumption activities. Along with the establishment of consumption tax, existing local taxes on consumption such as electricity and gas taxes were abolished and other special consumption taxes on restaurants and amusement taxes were streamlined. Local consumption transfer tax was established to compensate for the revenue reduction for local budgets, which allocate one fifth of national consumption revenue to local governments (6/11 revenue to prefectures and 5/11 revenue to municipalities). Both the population size and the number of employees are used as benchmarks for revenue allocation. In the process promoting fiscal decentralization and guaranteeing further adequate revenue for local budgets, local consumption tax was established in 1997 as an independent revenue source for local public finance in Japan8. Local consumption tax is, in substance, a surtax on national consumption tax. In other words, the tax base is national consumption tax revenue. The tax rate is 25% of the amount of consumption tax (national VAT), namely, equivalent to a consumption tax rate of 1%. Appendix Figure 1 shows a conceptual diagram of the structure of local consumption tax. While local consumption tax is a prefectural tax, the national tax administration agency conducts the collection of local consumption tax on behalf of local governments and taking the administrative burden of taxpayers 9 into account. Regarding tax administration of import transactions, tax should be paid to the national government (customs house) with the national consumption tax permanently. Prefectures pay fees on tax collection and the management of local consumption tax to the national government. The Destination principle, representing the nature of taxable consumption, is adopted in the management of national consumption tax. In other words, tax jurisdictions should be regions of final consumption (where consumers burdening taxes reside). Tax adjustments are applied at national borders. In other words, taxes are exempted for transfers of export goods in a market for export goods, and imposed on import goods respectively. Regarding the cross border transactions in local consumption tax, if we retain consistency with the national and local consumption taxes, tax adjustments are necessary at regional borders. However, given the lack of regional borders compatible with customs houses, an alternative scheme is necessary to match tax jurisdictions and regions of final consumption, hence a clearing house system is adopted in distributing its tax revenue in Japan. The clearing house allocates revenues among local governments, and local consumption tax law guarantees that places of final consumption corresponding to residence (roughly) are entitled to obtain the tax revenue. Statistical indices, such as the amount of annual retail trade sales (Census of Commerce), revenue from personal sales of service industries (Survey on Service Industries), population census and persons engaged (Establishment and Enterprise Census) are used (Appendix Table 1). In other words, the tax revenue of local consumption tax is redistributed to prefectures in proportion to the amount of their final consumption
8 9
Local consumption transfer tax was abolished by the introduction of local consumption tax in 1997. The additional clause of local tax law defines the national administration joint collection of national and local consumption tax until further notice.
Chapter VII.
statistics10. Thus, in Appendix Figure 1, Business proprietor B pays local consumption tax (local consumption tax received from consumers by deducting the amount paid to business proprietor A) to the national taxation office located in prefecture Y (The tax revenue is paid to prefecture Y). Business proprietor A pays local consumption tax received from Business proprietor B to the national taxation office located in prefecture X (The tax revenue is paid to prefecture X). The application of the clearing house system redistributes local taxation revenue on the basis of consumption levels among prefectures. The system thus matches the place of final consumption and the place of taxation at a macro level. After traversing the clearing system, 1/2 of the local consumption tax revenue is paid to municipalities within prefectures on the basis of population and the number of persons engaged in enterprises. A portion of tax revenue of national consumption tax is also used for equalization grants (local allocation tax), for both prefectures and municipalities in Japan. The funding pool of equalization grants consists 29.5% of consumption tax revenue, 32% of income tax revenue and liquor tax revenue, 35.8% of CIT revenue and 25% of tobacco tax revenue. The grants are transferred from national to prefectural and municipal budgets through special account of local allocation and local transfer taxes. In allocating equalization grants to prefectural and municipal budgets, both local fiscal needs and fiscal capacity (75% of prefectural or municipal tax revenue etc.) are taken into account in its formula.
Deemed to be the consumption level used to allocate local consumption tax revenue to prefectures. The consumption level consists of: (1) the amount of annual retail trade sales and revenue from personal sales of service industries (total sum), (2) 1/6 of the total sum prorated on the basis of population, and (3) 1/6 of the total sum prorated on the basis of the number of persons engaged in enterprises.
10
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References Bird, R. M. Robert D. Ebel, Christine I. Wallich (eds.) (1995) Decentralization of the socialist state: intergovernmental finance in transition economies, International Bank for Reconstruction and Development/The World Bank (World Bank regional and sectoral studies) Bird, R. M. and Smart (2002) Intergovernmental Fiscal Transfers: International Lessons for Developing Countries, World Development, Vol. 30, No. 6, pp. 899-912 Boadway, R., S. Roberts, A. Shah (1994) Fiscal Federalism Dimensions of Tax Reform in Developing Countries, Policy Research Working Paper 1385, World Bank Ebel, R. and R., Taliercio (2004) Sub-national Tax Policy Design and Administration in Transition and Developing Economies, International Symposium on Fiscal Decentralization in Asia Revisited, November 5 & 6 2004, Hitotsubashi University, Kunitachi Tokyo Kenyon (1987) Tax Policy in an Intergovernmental Setting: Is it time for the U.S. to Change? in Fisher, R. C. (ed.) Intergovernmental fiscal relations, Kluwer Academic Publishers Martinez-Vazquez, J. (2005) Making Fiscal Decentralization Work in Vietnam, International Studies Program Working Paper 05-13, June 2005 Andrew Young School of Policy Studies McLure, Jr. C. E. (ed.) (1983) Tax assignment in federal countries, Centre for Research on Federal Financial Relations, Australian National University, in association with the International Seminar in Public Economics, 1983 Rao M.G. (2003) Challenges of fiscal decentralization in developing and transitional economies: an Asian Perspective, in Martinez-Vazquez, J. and Alm J. (eds,) Public Finance in Developing and Transitional Countries, Edward Elgar Research group of local consumption tax (ed.) Local Consumption Tax (in Japanese), Gyosei, 1998 R. Simanjuntak and Mahi, R., 2003 Local Tax Revenue Mobilization and Local Borrowing, Paper presented at International Symposium on Indonesias Decentralization Policy: Problems and Policy Directions, January 31-February 1, 2003, Hitotsubashi Memorial Hall, Hitotsubashi University Tokyo, Japan Ter-Minassian, T. (1997) Fiscal Federalism in Theory and Practice, International Monetary Fund World Bank (2000) Vietnam: Managing Public Resources Better, Public Expenditure Review 2000, Joint Report of the Government of Vietnam? Donor Working Group on Public Expenditure Review, December 2000
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World Bank (2004a) Vietnam: Managing Public Expenditure for Poverty Reduction and Growth, Public Expenditure Review and Integrated Fiduciary Assessment 2004 (mimeo) World Bank (2004b) Vietnam - Development Report 2005 - Governance, Vol. 1
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Table 3.1: Revenue Assignment Between Central and Local Budgets Under the State Budget Law 2002 Central Budget Export/import duty Value added tax on imported goods Excise tax on imported goods Corporate income tax Tax and other revenue from crude oil Proceeds collected from Government lending and capital contributions Non-refundable aids for Central Government Fees and charges Local Budget Housing and land tax Natural resources tax (except that on crude oil) License tax Land transfer tax Agricultural land use tax
Unshared revenue sources
1. 2. 3. 4. 5. 6.
1. 2. 3. 4. 5.
6. Land use fees
7. 8.
7. Rental of land
8. Proceeds from sale and lease of the State owned house and building 9. Unused revenue of previous 9. Registration fees fiscal years 10. Others 10. Proceeds from lottery activity 11. Proceeds collected from Government lending and capital contributions 12. Grants for local governments 13. Fees and charges 14. Proceeds from utilization of public lands
Shared revenue sources
1. 2. 3. 4. 5. 6.
15. Proceeds mobilized from businesses and individuals in accordance with regulations 16. Unused revenue of previous fiscal years 17. Supplemented from central budget 18. Contributions from local people for construction of infrastructure in accordance with regulations 19. Voluntary contributions Value added tax (except that on imported goods) Corporate income tax (except that of nationwide business activity1) Income tax on high income earners Profit remittent tax 2 Excise tax on domestic goods and service Petroleum fees
Chapter VII. Revenue Assignment between the Central and Local Budgets in Vietnam
Source: VMOF
Corporate income tax from nationwide business activities, in which profits cannot be assigned to a single province such as post and telecommunications, electricity generation and distribution enterprises are assigned exclusively to the central budget. 2 Profit remittance tax was abolished in January 2004.
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Table 3.2: Central and Local BudgetsTable in 2005 3.2

Central Budget Revenue Taxes, fees etc. Grant aid Amount carried forward Expenditure
Central and local budgets in 2005

Unit: billion dong 128,496 121,496 2,000 5,000 169,246 129,026 40,220 22,363 17,857 40,750 100,724
Expenditure excluding transfers to local budgets Transfers to Local budgets Deficit financing of local budgets Other supplementary allocations Deficit financing Local Budgets Revenue Taxes, fees etc. Transfers from central budget Amount carried forward Expenditure Expenditure of Local budgets (Province, District and Communes) excluding National Target Programs etc. National Target Programs etc. Source: VMOF 2005 February
59,504 40,220 100,724 82,867 17,857
Table 3.3:
Scope of the Revenue of the Central and Local Budgets

Chapter VII.
Local budget
Central budget
Prior to the enactment of State budget law 1991 1992 1993 1994 1995 1996 After the introduction of the State budget law 1997 1998 1999 2000 33.0% 33.3% 33.5% 33.2% 67.0% 66.7% 66.5% 66.8% 38.8% 36.0% 43.1% 39.4% 28.3% 29.5% 61.2% 64.0% 56.9% 60.6% 71.7% 71.5%
Source (2001): Financial Journal, p. 12
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Table 3.4:
Central and Local Budget Expenditure (Average in the Period 1996-2000) Unit: (%) Local budget expenditure Central budget expenditure
Agriculture and Fishery Transportation Industry Economic services Education Health Social Security Culture and Sport Research and Development Others
40.8 40.0 36.6 39.7 73.4 62.9 9.3 63.1 78.3 37.3
59.2 60.0 63.4 60.3 26.6 37.1 90.7 36.9 21.7 62.7
Source: Extract from Public Expenditure Review 2000 (World Bank)
Table 3.5:
Structure of the Local Budget Expenditure

Chapter VII.
Unit: Percentage (%) 1997 Total local budget expenditure Of which: Capital Expenditure Recurrent Expenditure Education Health Public administration Culture and Sport Economic services Research & Development 26.7 73.3 32.7 9.7 19.1 3.0 13.5 0.8 29.6 70.4 35.1 8.7 18.3 3.3 14.7 0.9 36.2 63.8 34.1 8.2 17.3 3.4 12.7 0.9 34.3 65.7 37.8 10.3 15.1 3.5 13.6 1.1 100.0 1998 100.0 1999 100.0 2000 100.0
Source: VMOF
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Table 3.6:
Revenue and Expenditure Composition in Provincial Budgets: The figures in the table represent those of provinces accounting for respective shares of total revenue (total expenditure)
Source: Authors calculation on the basis of VMOF data.
Table 3.7:
Revenue and Expenditure Composition in District Budgets: The figures in the table represent those of provinces (districts are aggregated by provinces) accounting for respective shares of total revenue (total expenditure)
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Table 3.8: Revenue and Expenditure Composition in Commune Budgets: The figures in the table represent those of provinces (communes are aggregated by provinces) accounting for respective shares of total revenue (total expenditure)
Table 3.9: Tax Revenue Composition in Provincial Budgets: The figures in the table represent those of provinces accounting for respective shares of total revenue
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Table 3.10: Tax Revenue Composition in District Budgets: The figures in the table represent those of provinces (districts are aggregated by provinces) accounting for respective shares of total revenue
Table 3.11: Tax Revenue Composition in Commune Budgets: The figures in the table represent those of provinces (communes are aggregated by provinces) accounting for respective shares of total revenue
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Table 3.12: Per Capita Tax Collection Among Provinces (settled 2000) and Table 3.12 Per capita tax collection among provinces (settled 2000) and rates of Rates of Revenue Sharing of Shared Taxes for FY 2000 and FY 2005 revenue sharing of shared taxes for FY 2000 and FY 2005
Province or city per capita tax revenue in the Locality (million Dong) per capita transfers (million Dong) per capita provincial expenditure (million Dong) revenue sharing ratios of shared tax revenues (2000 settled) 30 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 24 100 100 100 52 53 100 48 100 100 100 100 100 100 100 100 100 100 100 100 revenue sharing ratios of shared tax revenues (2005 budget) 32 95 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 99 100 100 98 100 100 100 100 100 100 100 100 100 95 100 100 100 100 52 100 100 100 100 29 100 86 100 44 49 100 42 99 100 100 99 99 100 100 50 100 100 100 100 Average growth rate of RGDP for the years 19972001(5year s average) 11.9 10.0 18.3 11.3 17.2 10.6 13.4 11.0 8.1 7.0 9.2 29.6 10.5 6.7 11.3 10.2 10.2 10.2 10.4 9.1 8.7 13.4 6.0 10.6 7.4 8.2 10.8 9.0 11.5 8.9 9.5 13.6 11.3 9.3 10.0 11.3 12.5 9.5 8.2 4.2 6.3 8.5 4.8 15.4 10.6 12.6 10.8 11.2 17.0 7.6 8.6 9.6 7.9 8.8 7.6 10.4 11.0 7.2 10.9 18.2 11.9
Hanoi Haiphong Vinhphuc Hatay Bacninh Haiduong Hung-yen Hanam Namdinh Thaibinh Ninhbinh Hagiang Caobang Laocai Baccan Langson Tuyenquang Yenbai Thai-nguyen Phu-tho Bacgiang Quangninh Laichau Sonla Hoabinh Thanhhoa Nghe-an Hatinh Quangbinh Quangtri Thuathien-Hue Danang Quangnam Quang-ngai Binhdinh Phu-yen Khanhhoa Kontum Gialai Daklak Lamdong Hochiminh Ninhthuan Binh-phuoc Tayninh Binhduong Dongnai Binhthuan Baria-Vungtau Long-an Dongthap Angiang Tie ngiang Vinhlong Bentre Kien-giang Cantho Travinh So ctrang Baclieu Camau
coefficient of va riation (CV)
4.62 2.26 0.55 0.17 0.25 0.32 0.14 0.17 0.19 0.17 0.10 0.18 0.13 0.28 0.10 1.15 0.12 0.13 0.15 0.25 0.08 1.68 0.06 0.11 0.14 0.15 0.12 0.31 0.17 0.43 0.43 1.96 0.14 0.12 0.29 0.29 0.98 0.27 0.24 0.22 0.32 4.75 0.16 0.25 0.44 1.51 1.12 0.24 5.41 0.38 0.34 0.32 0.38 0.40 0.23 0.40 0.39 0.17 0.21 0.27 0.24 1.77
0.19 0.17 0.28 0.25 0.29 0.15 0.29 0.33 0.24 0.28 0.40 0.96 1.06 0.79 1.31 0.77 0.66 0.64 0.35 0.31 0.31 0.29 0.69 0.55 0.56 0.29 0.37 0.51 0.60 0.85 0.57 0.34 0.50 0.46 0.32 0.40 0.21 0.93 0.37 0.28 0.32 0.07 0.45 0.44 0.21 0.08 0.05 0.26 0.51 0.33 0.32 0.21 0.18 0.25 0.25 0.16 0.18 0.34 0.35 0.37 0.26 0.62
1.02 0.60 0.46 0.33 0.44 0.35 0.42 0.45 0.32 0.35 0.47 1.01 1.04 0.86 1.16 0.85 0.80 0.75 0.49 0.48 0.37 0.77 0.69 0.63 0.69 0.40 0.51 0.48 0.72 0.89 0.78 1.02 0.60 0.53 0.50 0.56 0.75 1.06 0.56 0.47 0.62 0.88 0.49 0.68 0.55 0.86 0.52 0.47 1.18 0.53 0.52 0.47 0.44 0.48 0.42 0.51 0.45 0.47 0.46 0.56 0.47 0.36
Source: Author's calculation based on VMOF data.
Table3.13 3.13(1): (1):Case CaseStudy_Ninh Study Ninh Thuan Province 2003 Table Province_2003
Administrative
(billion Dong, %)
Chapter VII.
level
Expenditure Own expenditures + Capital expenditure
Amount (billion VND)
Share (%)
Revenue
Assistances from the central budget
Amount (billion VND) 1.196 382 45
Share (%) 0.1% 30.4% 3.6%
Land related taxes
Province
+ Current expenditure
(Assistances for balancing budget to district and commune levels)
236.674 55.762 518.487
45.6% 10.8% 100.0%
Borrowing
Total Own expenditures + Capital expenditure + Current expenditure District

(Assistances for balancing budget to district and commune levels)
Total Land related taxes Assistances from the provincial budget
1,258 1.168 55.762
100.0% 1.3% 59.8%
55.287 23.823
69.0% 29.7%
Total Own expenditures + Capital expenditure Commune + Current expenditure
80.143
100.0%
Total Land related taxes Assistances from the district budget
93.322 0.377 23.823
100.0% 1.1% 72.5% 0.0%
29.525
99.5%
Total
29.678
100.0% Total
32.859
100.0%
255
Source: Author's calculation based on the data provided by Ninh Thuan Province
256
Table 3.13 (2): Case Study Thai Binh Province 2003

(billion Dong, %)
Administrative level Amount (billion VND) 1,200.60 292.4 908.2 Amount (billion VND) 63.9 4 2.8 1,187
Expenditure Own expenditures + Capital expenditure + Current expenditure
Share (%)
Revenue
Share (%) 5.1% 0.3% 0.2% 94.4%
100.0% Land using revenue Land and water space rental 24.4% revenue 75.6% Land related taxes Other revenues
Province
Total Own expenditures + Capital expenditure + Current expenditure District
1,200.60 270.1 46.7 223.4
100.0% Total 100.0% Land related taxes 17.3% Other revenues 82.7%
1,258 4.4 276.6
100.0% 1.6% 98.4%
Total Own expenditures + Capital expenditure Commune + Current expenditure
270.1 230.7 56.9 173.8
100.0% Total 100.0% Land related taxes 24.7% Other revenues 75.3%
281 3.6 254.4
100.0% 1.4% 98.6% 0.0%
Total
230.7
100.0% Total
258
100.0%
Source: Author's calculation based on the data provided by Thai Binh Province
Chapter VII.
Table 3.14: Tax Individual income tax generally non-progressive Corporate income tax Value added tax Retail sales tax Excise taxes Natural resource taxes Customs duties Estate taxes Property taxes User charges Payroll tax Environmental taxes Source: Kenyon (1997) p.72
Optimal Tax Assignment Appropriate Level of Government to Levy Tax
C C or S C C S C or S C or S C C L C or S or L C or S C or S
Note: C = central, S = state, and L = local.
258
Table 3.15: Distribution of Different Taxes Within Different Levels of Government

(In percent) Central Government Domestic taxes on Property goods and services Income tax tax State Government Domestic taxes on Other Property goods and services taxes Income tax tax Grants as percentage of taxes plus grants Local Government Domestic taxes on Other Property goods and services taxes Income tax tax Grants as percentage of taxes plus grants
Other taxes Country and Year Indusrial countries Federal Australia (1991) 71.9 0.3 22.8 5.1 0.0 30.1 40.9 28.9 58.8 0.0 100.0 0.0 0.0 Canada (1989) 59.3 0.0 21.3 19.4 43.1 3.6 39.9 13.3 21.9 0.0 84.6 1.4 14.0 1 16.1 0.1 31.5 52.4 62.5 6.6 30.9 0.0 19.2 88.2 11.4 0.4 0.0 Germany (1991) Spain (1990) 33.2 0.4 24.7 41.7 7.6 60.9 31.3 0.2 77.0 22.6 31.1 42.7 3.6 United States (1991) 55.1 1.1 4.1 39.7 37.4 3.9 55.8 2.9 28.9 5.6 75.3 19.1 0.0 2 Unitary 35.1 2.7 25.6 36.7 75.8 0.0 17.2 7.0 Belgium1 (1990) 1 19.1 2.8 30.6 47.5 0.0 0.0 0.0 100.0 France (1991) 33.3 2.3 23.7 40.6 0.0 43.9 0.0 56.1 Netherlands1 (1991) Norway (1990) 21.5 1.4 44.7 32.3 87.7 8.6 0.7 3.0 Sweden (1991) 14.4 4.6 35.5 45.5 100.0 0.0 0.0 0.0 1 39.1 8.5 33.9 18.4 0.0 1.6 0.0 98.4 United Kingdom (1991) Developing countries Federal 3 18.6 0.5 44.9 36.0 0.0 1.8 89.5 8.7 48.7 India (1990) 6.1 5.2 17.1 71.5 17.9 8.2 4.3 69.5 0.0 Argentina (1989)3 Brazil (1991) 22.5 0.1 27.9 49.5 0.0 4.3 89.8 5.9 23.3 0.0 45.5 50.6 3.9 Mexico (1987) 26.5 0.0 72.5 1.0 2.5 0.0 0.4 97.1 3.3 4.4 7.9 2.3 85.4 2 Unitary Hungary (1990) 21.2 0.1 37.1 41.6 100.0 0.0 0.0 0.0 Poland (1988) 32.0 2.2 32.0 33.8 37.5 8.7 19.6 34.2 Israel (1990) 42.4 1.0 39.1 17.5 0.0 96.0 0.0 4.0 Thailand (1990) 26.2 3.6 45.0 25.1 0.0 17.0 83.0 0.0 Chile (1988) 30.7 0.5 48.8 20.0 0.0 56.0 44.0 0.0 Kenya (1991) 29.3 0.0 53.7 17.0 0.0 84.2 15.3 0.5 South Africa (1990) 54.6 1.6 36.6 7.2 0.0 0.0 100.0 0.0 91.5 0.0 100.0 0.0 0.0 Zimbabwe (1986) 47.6 0.4 32.8 19.2 0.0 77.4 15.7 6.9 Source: International Monetary Fund, Government Finance Statistics Yearbook . 1 Includes supernational authorities' share of general government total tax revenue for Belgium (1.5 percent), France (0.7 percent), Gernamy (0.9 percent), the Netherlands (1.4 percent), and the United Kingdom (1.2 percent). 2 There are no state governments in unitary countries. 3 No data on local governments are available. Source: Ter-Minassian (ed.) [1997] Fiscal Federalism in Theory and Practice, IMF, p. 58
29.9 53.7 44.7 43.1 47.6 62.1 44.7 90.2 45.9 21.5 85.8
77.5 5.5 59.4 29.8 50.0 32.9 52.1 0.0 37.5 80.8
Appendix Table 1: Statistics Used forfor the Calculation of the Cleaning House Scheme Appendix Table.1 Statistics used the calculation of the Clearing House Scheme of Local Consumption Tax (VAT) in Japan of local consumption tax (VAT) in Japan
Indices Amount of annual retail trade sales Revenue from personal selling of service industries Survey on Service Industries Population Census Persons engaged
Statistics
Census of Commerce
Population Census
Establishment and Enterprise Census

The Establishment and Enterprise Census is conducted with an aim to clarify the actual state of business activities by all the establishments and the enterprises in Japan, to ascertain the industrial structure of the country, and to provide a basic statistical framework for other sample surveys on economic activities every 5 years
Survey objectives
The purpose of the Commerce Statistical Survey is to investigate the actual situation of the Japanese commerce industry.
The purpose of the Survey on Service Industries is to clarify the industrial composition and the size of service establishments and to elucidate their business activities and performances.
The Populatin Census has been conduced to ascertain the situation of the population of the country.
Survey frequency
every 3 years
every 5 years
every 5 years
259
Appendix Table 2: The Structure of Local Consumption Tax (Conceptual Diagram) Appendix Table 2 The structure of local consumption tax (conceptual diagram)
flow of goods and services flow of money
260
(Prefecture X)
(producer) Business proprietor A payment of tax (retailer) Business proprietor B payment of tax
(Prefecture Y)
Consumers in Prefecture Y
(National taxation office located (National taxation office located in in prefecutre X) prefecutre Y) consumption tax local consumption tax (25% of consumption tax revenue) payment
consumption tax local consumption tax (25% of consumption tax revenue)
payment
Prefecture X
Clearance
Prefecture Y
granting 1/2 tax revenue to municipalities located in prefecture X
granting 1/2 tax revenue to municipalities located in prefecture X
Source: Research group of local consumption tax (ed.) Local Consumption Tax (in Japanese) , Gyosei, 1998 p. 181 (author's translation)

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Chapter VII

Revenue Assignment between the Central and Local Budgets in Vietnam

Revenue Assignment between the Central and Local Budgets in Vietnam

Unshared revenue sources

6. Land use fees

Shared revenue sources

Table 3.2: Central and Local BudgetsTable in 2005 3.2

Central and local budgets in 2005

59,504 40,220 100,724 82,867 17,857

Scope of the Revenue of the Central and Local Budgets

Revenue Assignment between the Central and Local Budgets in Vietnam

Source (2001): Financial Journal, p. 12

Source: Extract from Public Expenditure Review 2000 (World Bank)

Structure of the Local Budget Expenditure

Revenue Assignment between the Central and Local Budgets in Vietnam

Source: Authors calculation on the basis of VMOF data.

Source: Authors calculation on the basis of VMOF data.

Source: Authors calculation on the basis of VMOF data.

Source: Authors calculation on the basis of VMOF data.

Source: Authors calculation on the basis of VMOF data.

Source: Authors calculation on the basis of VMOF data.

Source: Author's calculation based on VMOF data.

Expenditure Own expenditures + Capital expenditure

Amount (billion VND)

Amount (billion VND) 1.196 382 45

Share (%) 0.1% 30.4% 3.6%

Land related taxes

Revenue Assignment between the Central and Local Budgets in Vietnam

236.674 55.762 518.487

45.6% 10.8% 100.0%

Total Own expenditures + Capital expenditure + Current expenditure District

Total Land related taxes Assistances from the provincial budget

1,258 1.168 55.762

100.0% 1.3% 59.8%

Total Own expenditures + Capital expenditure Commune + Current expenditure

Total Land related taxes Assistances from the district budget

93.322 0.377 23.823

100.0% 1.1% 72.5% 0.0%

Table 3.13 (2): Case Study Thai Binh Province 2003

Expenditure Own expenditures + Capital expenditure + Current expenditure

Share (%) 5.1% 0.3% 0.2% 94.4%

Total Own expenditures + Capital expenditure + Current expenditure District

1,200.60 270.1 46.7 223.4

1,258 4.4 276.6

100.0% 1.6% 98.4%

Total Own expenditures + Capital expenditure Commune + Current expenditure

270.1 230.7 56.9 173.8

281 3.6 254.4

100.0% 1.4% 98.6% 0.0%

Optimal Tax Assignment Appropriate Level of Government to Levy Tax

Note: C = central, S = state, and L = local.

Table 3.15: Distribution of Different Taxes Within Different Levels of Government

Establishment and Enterprise Census

consumption tax local consumption tax (25% of consumption tax revenue)

granting 1/2 tax revenue to municipalities located in prefecture X

granting 1/2 tax revenue to municipalities located in prefecture X

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