People apply for personal income tax refunds at Hà Nội Tax Department. VNA/VNS Photo Hoàng Hùng

How is the credit for a tax payer is calculated?

The deduction credit is the amount of money exempted from tax so the taxpayer can spend for him/herself and to raise his/her children who are under 18, or disabled offspring over 18 years old and unable to work, or students at universities, colleges, job-training schools with no income or average income under VNĐ1 million per month.

According to common practice in other foreign countries, the deduction rate applies to all income generated from salary, wage or income from business of the person who is subject to tax.

The overall rule of the deduction for the dependent family members is to ensure that after paying his/her personal income tax, the tax payer still is able to enjoy the life of an average income earner in the society. That’s why almost all nations have adopted a formula that an income tax payer has to spend for him/herself between 1-2.5 times of the average income in their country.

Previously in Việt Nam, personal income tax was only levied on high income earners. However, as Việt Nam's economy has improved considerably and there is a need for a better tax system along the principle of equality and the income adjustment of people, the  National Assembly in 2007 decided to adopt the Law on Personal Income Tax and the law came into effect on January 1, 2009.

A key objective of the 2009 Law on Personal Income Tax is not to be applied to only high wage income earners, but to all working people with average income in the society. From that point of view, an individual has to pay income tax scale from a threshold of 1-1.5 time the average per capita income in Việt Nam.

Does that mean any wage earner who earns VNĐ9 million per annum has to pay monthly income tax?

The latest adjustment in the income tax deduction rate was adopted in 2012 and came into force on July 1, 2013. At that period of time, Việt Nam’s consumer price index (CPI) increased by some 60 per cent compared to 2009. However, to help stabilise the Law, the National Assembly, decided to raise the floor of an income tax payer from VNĐ4 million to VNĐ9 million per month – an increase of 125 per cent.

In other words, more than five years after the 2013 Law on Personal comes into force, until now its validity is the same.

In 2018, the average income per capita for Vietnamese was US$2,587 or VNĐ58.5 million, equal to VNĐ4,875,000 per month, the deduction for an income earner is equal to 1.85 times of the average income per capita.

Just make an assumption, if the average income in 2019 is expected to be VNĐ62.5 million – which is VNĐ5.2 million/month. In such a case, the individual income of a person who has to start paying tax will be equal to 1.73 times the average income per capita in the country.

When will Việt Nam be able to adjust the reduction rate in accordance with the Law on Personal Income Tax?

Article 19 of the Personal Income Tax says when the CPI is changing over 20 per cent compared to the time when the law comes into force or the time of the latest adjustment of the reduction rate, the Government will then ask the National Assembly to revise the law.

According to the General Statistics Office, by July 2019, Việt Nam CPI has increased by 16.07 per cent compared to July 2013.

Meanwhile, the Government has projected that Việt Nam CPI in 2019 would increase less than 4 per cent. Meanwhile, according to the National Financial Supervisory Commission, Việt Nam’s CPI, in 2019, will increase less than 3.6 per cent.

So it is projected that the Việt Nam CPI in 2019 will increase to 19.67 per cent.

So based on the Law on Personal Income Tax, as from 2020, the reduction rate will likely be revised up. — VNS