Legal considerations for manufacturing companies seeking vat reduction in compliance with applicable laws

In the current context, many manufacturing companies are interested in obtaining VAT reductions in order to optimize production costs. The following article analyzes available forms of VAT reduction, relevant legal regulations, required documents, as well as potential risks and legal consequences of non-compliance. It also provides guidance to help enterprises ensure compliance and seek support from reputable law firms.

I. Current situation of manufacturing companies seeking VAT reduction

At present, many manufacturing companies seek VAT reductions due to rising production costs and the need to optimize cash flow. However, the application of VAT reduction policies remains challenging due to complex administrative procedures, stringent requirements, and limited understanding of relevant legal provisions. Such situations expose some enterprises to legal risks or rejection of VAT reduction applications by tax authorities where conditions are not fully satisfied.

II. Overview of VAT reduction for manufacturing companies

1. What forms of VAT reduction are available?

Forms of VAT reduction available to manufacturing companies include exemption from output value-added tax and reduction of applicable VAT rates in accordance with the Law on Value-Added Tax 2024 and its guiding instruments. Each form is applied based on industry sector, product type, investment conditions, and applicable state incentives, thereby enabling enterprises to reduce tax burdens and enhance competitiveness.

2. Can VAT reduction be applied to all products?

Pursuant to Article 1 of Decree No. 174/2025/ND-CP, the reduction of VAT to 8% from July 1, 2025 to December 31, 2026 applies only to goods and services currently subject to the 10% VAT rate under Clause 3, Article 9 of the Law on Value-Added Tax 2024 (including various consumer goods such as garments and household items; passenger transport, accommodation, catering services; as well as construction materials and repair and maintenance services).

However, the reduction does not apply to certain sectors such as telecommunications, finance and banking, securities, insurance, real estate, metal products, mining products (except coal), and goods and services subject to excise tax (except gasoline).

The VAT reduction is applied consistently across importation, production, processing, and commercial trading stages. Accordingly, manufacturing companies cannot apply VAT reduction to all products, but only to those falling within the eligible categories under the Decree.

III. Legal regulations applicable to VAT reduction for manufacturing companies

1. What does Vietnamese law provide regarding VAT reduction?

Vietnamese law and relevant decrees clearly regulate the scope, tax rates, and conditions for VAT reduction applicable to manufacturing companies in order to support production activities and ensure consistent legal enforcement.

• Legal basis and scope of application: Pursuant to Clause 1, Article 1 of Decree No. 174/2025/ND-CP, from July 1, 2025 to December 31, 2026, goods and services subject to the 10% VAT rate are reduced to 8%, except for the categories listed in Appendix I (telecommunications, finance, banking, securities, insurance, real estate, metal products, mining products except coal) and Appendix II (goods and services subject to excise tax except gasoline). The reduction applies uniformly across importation, production, processing, and trading stages.
• VAT rates and applicable cases: Under Article 9 of the Law on Value-Added Tax 2024, a 0% rate applies to exported goods and services; a 5% rate applies to certain agricultural products, medical equipment, clean water, and science and technology services; and a 10% rate applies to goods and services not subject to the 0% or 5% rates. Accordingly, goods subject to the 10% rate are reduced by 2% to 8%, except for those listed in the appendices I and II of Decree 174/2025/ND-CP. 
• VAT calculation methods: Under Article 10 of the Law on Value-Added Tax 2024, enterprises may apply either the credit method or the direct method. The 2% VAT reduction applies to enterprises using the credit method, while maintaining the existing calculation approach.

Accordingly, manufacturing companies seeking VAT reduction must correctly determine product categories, applicable tax rates, timing, and calculation methods, and strictly comply with Decree No. 174/2025/ND-CP and the Law on Value-Added Tax 2024.

2. Are supporting documents required?

To benefit from VAT reduction policies, manufacturing companies must properly declare taxes and provide supporting documents as required by law.

Pursuant to Appendix III of Decree No. 174/2025/ND-CP, enterprises must use the prescribed form for 2% VAT reduction declaration. Specifically:

• VAT declarations must be complete and in the correct form, accompanied by supporting documents such as invoices, contracts, warehouse receipts, and payment records evidencing that goods or services are eligible for tax reduction;
• All documents must be lawful and accurately reflect actual transactions to facilitate inspection and audit by tax authorities.

Proper documentation enables tax authorities to verify eligibility and helps enterprises avoid reassessment or administrative sanctions. 

3. When does a manufacturing company become ineligible for VAT reduction?

VAT reduction applies only where all legal conditions are satisfied within the prescribed incentive period.

A company becomes ineligible in the following cases:

• Where goods or services do not fall within eligible categories under Article 1 and Appendices I and II of Decree No. 174/2025/ND-CP (e.g., telecommunications, finance, banking, securities, insurance, real estate, metal and mining products, excise-taxable goods except gasoline);
• Where the incentive period (July 1, 2025 to December 31, 2026) has expired;
• Where the company fails to fulfill tax declaration obligations, provide valid documents, or violates tax regulations.

Thus, VAT reduction is granted only when all conditions are satisfied; otherwise, such entitlement will cease.

IV. Questions regarding VAT reduction for manufacturing companies

1. What legal consequences may arise if a manufacturing company is found in violation when applying for VAT reduction, such as intentionally providing false information?

Pursuant to Article 12 of Decree No. 125/2020/ND-CP, acts of incorrect or incomplete declaration in tax dossiers shall be subject to administrative sanctions depending on the nature and impact on tax obligations. Specifically:

• Where incorrect or incomplete information does not affect the determination of tax liability (i.e., does not result in underpaid tax or an increase in tax exemption or reduction), a fine ranging from 500,000 VND to 2,500,000 VND shall be imposed under Clauses 1 and 2, Article 12.
• Where incorrect or incomplete information directly affects the determination of tax liability (e.g., declaring an incorrect VAT rate applicable to goods or services), a fine ranging from 5,000,000 VND to 8,000,000 VND shall be imposed under Clause 3, Article 12.

Remedial measures include mandatory re-declaration and submission of complete tax dossiers, as well as adjustments to reported losses and deductible input VAT carried forward to subsequent periods (if any). The above sanctions apply to organizations; business households and individuals are subject to 50% of such fines according to Point (a), Clause 4, Article 7 and Clause 5, Article 5 of Decree No. 125/2020/ND-CP.

In addition to administrative sanctions, serious violations resulting in tax underpayment may lead to criminal liability under the Penal Code, including the offence of tax evasion (Article 200 of the Penal Code 2015, as amended in 2017), particularly where significant tax amounts are evaded or fraudulent conduct is used to obtain improper tax reductions.

Accordingly, violations in VAT reduction applications may result in fines, mandatory supplementation of dossiers, adjustment of tax liabilities, and, in serious cases, criminal prosecution. Honest and complete declaration is therefore mandatory to avoid significant legal risks.

2. How will a manufacturing company be sanctioned if it fails to fulfill tax obligations after receiving VAT reduction?

Pursuant to Article 17 of Decree No. 125/2020/ND-CP, failure to fulfill tax obligations after benefiting from VAT reduction may be deemed tax evasion and subject to strict sanctions.

Typical violations include:

• Failure to submit tax declarations on time or submission delayed beyond 90 days;
• Failure to record taxable revenues in accounting books, or under-declaration of tax liabilities;
• Failure to issue invoices or issuance of incorrect invoices/documents; use of unlawful invoices/documents; misrepresentation of the purpose of tax-exempt or tax-reduced goods;
• Business operations during a suspension period without notifying tax authorities.

For sanction levels, a fine equal to: 

• 1 time the evaded tax amount where applying mitigating circumstances;
• 1.5 times the evaded tax amount where obtaining no aggravating or mitigating circumstances;
• 2 times the evaded tax amount where existing one aggravating circumstance;
• 2.5 times where including two aggravating circumstances;
• 3 times where having three or more aggravating circumstances.

Remedial measures include:

• Mandatory payment of the full evaded tax amount and late payment interest to the state budget;
• Mandatory adjustment of declared losses and deductible input VAT in tax dossiers (if any).

Failure to fulfill tax obligations after obtaining VAT reduction may result in substantial financial sanctions, mandatory correction of tax filings, and potential criminal liability in serious cases. Therefore, strict compliance with tax obligations is essential.

3. Can VAT reduction decisions be revoked?

VAT reduction decisions may be revoked where enterprises violate tax laws, such as providing false information, failing to fulfill tax obligations, or applying reduction to ineligible goods or services.

In such cases, enterprises must repay unpaid taxes, adjust tax declarations, and may face administrative or criminal sanctions depending on severity.

V. Why engage a reputable law firm for VAT-related matters

If your manufacturing company encounters difficulties in applying for VAT reduction or requires compliance assurance, NPLaw is a reputable and professional legal service provider offering comprehensive support, from consultation and preparation of documents to guidance in dealing with tax authorities.

With extensive experience in tax and corporate accounting, NPLaw assists enterprises in optimizing benefits, minimizing legal risks, and ensuring lawful, safe, and effective tax reduction.

The above information is for reference only. For detailed advice on specific cases, please contact NPLaw for prompt consultation.