Tax Department clarifies VAT exemption for agricultural seedlings and unprocessed agricultural produce, and the tax status of processed products

According to Official Letter 2300/CT-CS dated April 13, 2026, the Tax Department’s guidance on passion fruit seedlings emphasizes that enterprises and household businesses in agriculture must focus on the substance of their activities to determine the correct tax incentives.

In the case described in the letter—“Công ty cổ phần Chanh leo ươm tạo và sản xuất giống chanh leo công nghệ cao là sản phẩm vật liệu nhân giống cây trồng theo quy định của pháp luật về trồng trọt thì thuộc đối tượng không chịu thuế”—the tax authority examined whether the activity of germinating and producing passion fruit seedlings results in a product that is truly “plant variety” material, meaning seed propagation material used for agricultural production under the Law on Cultivation No. 31/2018/QH14 dated November 19, 2018.

The letter also cross-referenced the VAT Law No. 48/2024/QH15 dated November 26, 2025, which provides that VAT exemption applies only to unprocessed crops or crops that have undergone only simple preprocessing. Based on these legal grounds, the conclusion is that if a business sells seedlings as propagation material for farming, the sale is exempt from VAT.

Key principle: tax treatment depends on the product sold

Official Letter 2300/CT-CS dated April 13, 2026 highlights a recurring compliance error among smaller businesses: confusing “farming” with “not paying tax.” The letter’s underlying principle is that tax liability does not depend on whether the business is engaged in farming, but on the nature of the product sold to the market.

For example, the letter indicates that when a business sells passion fruit seedlings, the product is propagation material and should be VAT-exempt. It also notes that selling fresh passion fruit that has not been processed may be exempt. However, once the product is pressed into juice or syrup, it is no longer the original agricultural product and becomes a manufactured good, which must be taxed under the VAT law.

Common mistake: mixing exempt farming with taxable processing

The guidance points to a boundary issue in tax status. Some businesses begin with tax-exempt farming activities and then expand into processing to add value, but they continue to report all revenue under the initial exemption. When inspected, these misstatements across multiple periods can lead to tax adjustments and potential tax arrears.

The letter links this risk to the Tax Administration Law 2019, which requires taxpayers to declare accurately, honestly, and completely.

What the letter clarifies

Document 2300/CT-CS does not introduce new rules; rather, it provides a conclusive interpretation for agricultural cases. It clarifies that the boundary between non-taxable and taxable treatment is determined by whether the product sold retains its original essence as agricultural propagation material or whether it becomes a different commodity through processing.

In practice, this distinction is often only recognized by businesses after an audit, when reporting errors are identified and corrected.