Inflation makes income tax bite harder

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The festive season is not bringing in much cheer this year.

"In fact, life is getting more difficult," said a despondent Nguyen Tra My, a clerk with a communications firm in Hanoi.

My gets a monthly salary of a little over VND8 million (US$380.9), barely enough to meet the needs of her family living in the capital city, and she still has to pay personal income tax on her earnings.

"Every month, we have to spend over VND3 million on rent. It is not easy to live on what remains because everything in the city is very expensive. A four-member family needs a monthly income of at least VND10 million. I think the current personal income tax regulations are unfair," she said.

The current tax law, which was approved in late 2007 and took effect in January 2009, established a taxable monthly income threshold of VND4 million.

It also established a system of deductions. Tax payers are allowed to deduct VND1.6 million for each dependant who earns less than VND500,000 per month. But taxpayers say the deduction for dependants is too low.

"My parents get pensions of some VND2 million, and it is not enough for them. However, they are not considered dependants," My said. "Tax is not adjusted, while prices increase every day."

The deduction of VND1.6 million per month is not enough to cover the tuition fees as well as other living costs for each child, or old parents without income, said other taxpayers.

Tran Hoang Ngan, a member of the National Monetary and Financial Policy Advisory Council, said it was unfair for taxpayers if the threshold and deductions were applied when inflation was high, as it is now. "The taxable income threshold should be adjusted to keep up with the inflation hike that has taken place since the personal income tax was approved."

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The consumer price index increased by 12.63 percent in 2007 and 22.33 percent in 2008, before slowing down to 6.88 percent in 2009.

Prices rose 11.75 percent in 2010, according to the General Statistics Office.

Economist Tran Du Lich said: "We should not levy tax on income to afford life at minimum. Inflation rate should be calculated when we consider a taxable level. If inflation is high, we should adjust personal income tax accordingly."

In other countries, the personal income tax is imposed on income that can afford a decent life for people, and frequently adjusted in accordance with inflation, he noted.

The Ministry of Finance recently said it was considering raising the taxable income threshold. "Obviously, the government should deal with the issue (of increasing the taxable income threshold) and do it in 2011," Ngan said.

Tax targets

Dr. Nguyen Minh Phong of the Hanoi Socioeconomic Research Institute said the taxable income threshold is too low, as inflation, minimum wage and living standards change every year. It should be increased, and set as a percentage of the minimum wage.

The taxable threshold should be calculated based on the minimum wage set by the government maybe 7-10 times that sum, he said.

However, Nguyen Thi Cuc, chairwoman of Vietnam Taxation Consultant Association and former deputy director of General Department of Taxation, said: "We should not increase the taxable threshold now, as this is not a high income tax, but personal income tax. In Vietnam, the tax is not levied on low-income persons, but those with middle income and upwards."

As of last December, 7.2 million of the country's 86 million people were subject to the personal income tax law, according to the General Department of Tax.

The national per capita income is only $1,200 each year, or $100 per month. If, with two dependants, a person has to pay tax only when their monthly income exceeds VND7.2 million, ($342), or more than triple the monthly per capita income of $100. "Thus, it is unreasonable if we increase the threshold," Cuc said.

In addition, the tax law has been implemented for only two years, so it is unnecessary to adjust it now, she said. "In case the law is amended, I think we should not increase the taxable threshold, but expand the taxable brackets, as they are rather narrow at present," she said.

The tax on monthly incomes of the VND4-5 million bracket is 5 percent, and that for the VND5-10 million bracket is 10 percent. It is calculated progressively, scaling up to 35 percent.

Cuc said there are some shortcomings in tax management, as employees at state-owned enterprises and foreign invested ones strictly implement the law, while private traders, who trade in cash, find ways to circumvent taxes on their real incomes that are much higher than salaried employees.

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