The flaws in family circumstances-based personal income tax deduction

Lawyer Truong Thanh Duc, Director of ANVI Law Firm

>> Việt Nam to amend law on personal income tax

- As previously said, the regulation of family deductions is the most significant flaw in the current Personal Income Tax Law. Sir, could you please provide more information on this matter?

The current family circumstance deduction is not based on any convincing criteria, such as minimum living standards, per capita income, base salary, general minimum wage, or regional minimum wages. This means that regardless of the significant differences in minimum wage across regions, the starting income for tax payment and family deduction is the same. As a result, no matter how high or low the deduction is, it will be contentious.

Aside from that, the most logical approach to calculating family deductions is to combine two criteria: a set deduction and a variable deduction based on essential minimum expenditure needs, backed by invoices, vouchers, and other reasonable and lawful grounds. Presently, taxpayers are eligible for an 11 million VND deduction, with each dependent receiving 4.4 million VND. Several additional expenses, however, are overlooked, resulting in inconsistencies. For example, two people with the same income may have dramatically different schooling, healthcare, housing, and other expenses, but still have to pay the same amount of tax.

Furthermore, according to the current Personal Income Tax Law, the family deduction would be changed if the consumer price index (CPI) fluctuates by more than 20% from the preceding milestone. Yet, the adjustment process is hard and time-consuming, causing taxpayers inconvenience and complaints. In actuality, even a 10% price shift can have a substantial impact on the daily lives of salaried people, because vital commodities and services are frequently priced higher than the general price level. As a result, a more appropriate method is required, such as revising deductions as soon as inflation hits 5-10% or higher and automatically updating them based on General Statistical Office announcements.

>> Does there need to be a support policy on personal income tax?

- What are your thoughts on the Ministry of Justice's proposal to lower the number of steps for calculating PIT for salaried employees from 7 to 5?

We must first define the basic concept of each tax law before going into technical issues such as taxable income and progressive tax design. This will assist us in developing a cohesive voice when debating specific topics.

Officials of Hanoi Tax Department guide people to declare and pay personal income tax. Photo: Anh Viet

Even a tiny amount of income tax can be a burden for households with very low incomes. Families with above-average salaries, on the other hand, may face a severe progressive tax rate of up to 20-30%. To solve these difficulties, we must determine which tax brackets should be cut and by how much.

It is also unjust that unemployment payments be taxed at the same rate as high-income workers. These benefits are unclear and subject to change, making it difficult for recipients to plan for the future. We should explore changing the tax law to guarantee that individuals in need receive enough assistance without incurring unreasonable financial burdens.

- Could you make any recommendations for amending the Personal Income Tax Law this time?

There are three major difficulties with the personal income tax that, in my opinion, demand significant adjustments.

First, rather than just allocating a number that some may deem excessively high or too low, the minimal family deduction should be founded on scientific and rational standards.

Second, it is critical to decide which costs are necessary, justified, and reasonable enough to merit additional deductions.

Finally, the tax rate should be based on the number of levels, the amount of each level, and the income range covered. These latter two concerns are equally important as the first and may have a greater depth and breadth of influence.

Raising the family deduction too low may evoke a strong reaction, while raising it too high risks changing the essence of the tax and transforming it into a "high income tax." As a result, a modest general family deduction is required, but further deductions should be tailored to particular family circumstances.

Given changes in managerial skills, income characteristics, spending habits, and life context, the current surge in tax rates and earnings susceptible to high tax rates is too abrupt and out of date. As a result, it is critical to recalculate personal income tax collection and lower the number of steps in the direction of income and spending to reflect the reality faced by both taxpayers and dependents.

Sincerely, thank you!