New income tax proposals leave economists bemused

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Economists "˜shocked' and "˜puzzled' after National Assembly committee says new income threshold proposed by the government should be lowered to ensure state budget revenues

 Men withdraw money from ATMs in Hanoi. Vietnam has nearly four million personal income taxpayers at the moment. Photo: Reuters

An unusual controversy has broken out over the personal income tax proposals made by the Finance Ministry with the National Assembly arguing, surprisingly, for a lower threshold.

Since the typical National Assembly response is that the government's proposal does not go far enough in providing succor to the citizens in times of crisis, the legislature's apparent concern for maintaining state budget revenues over providing relief to taxpayers has puzzled and dismayed economists.

At a session reviewing the ministry's proposed amendments to the Personal Income Tax Law on September 7, the National Assembly's Finance and Budget Committee has said the new threshold for personal income tax should be VND7 million (US$332) per month instead of the VND9 million ($427) proposed by the Finance Ministry.

The committee also suggested that the deduction for each dependent of taxpayers at VND2.8 million ($133) per month instead of VND3.6 million ($171) recommended by the ministry.

According to the committee, the ministry's proposed threshold and deduction was very high.

Several members were concerned that the ministry's proposed adjustments would "narrow down the number of taxpayers, distort the nature of the tax and affect the state budget's income," said the committee's policy and budget collection subcommittee.

If the tax base is very small, it would amount to a tax on high incomes instead of personal income tax, it said.

It calculated that the number of taxpayers would decrease from nearly four million people at the moment to around one million if the ministry's proposed threshold was applied.

The amendments, expected to take effect in 2014, should not affect the state budget's income, the subcommittee said.

Currently, in Vietnam, people have to pay taxes if their monthly incomes reach VND4 million ($190); and they are allowed to set aside VND1.6 million ($76) for each dependent.

Economist Nguyen Minh Phong told Vietweek that the threshold and deduction recommended by the Finance Ministry would be "acceptable" in 2014, based on his calculations using the inflation and economic targets for that year. The National Assembly has asked the government to keep the inflation rate to single digits and achieve an economic growth of 6.5-7 percent in 2014, he noted.

"I really do not understand why the committee wants to reduce the proposed levels, because usually the government suggests low levels, and the reviewing committee increases them," he said.

Moreover, local economists have many times suggested that the Finance Ministry sets the income tax threshold at least ten times the minimum wage VND1.050 million ($49) per month so that people can cope when the economy fluctuates or inflation becomes too high, Phong said.

"Government agencies want to protect the income of the state budget, but they also need to consider that most people are still facing difficulties now."

The Finance Ministry once calculated that if its recommendations were approved, the state budget would lose VND13.35 trillion ($631.06 million) in 2014.

Personal income tax revenues are projected at VND46.3 trillion ($2.19 billion) in 2012.

Speaking at a meeting on Wednesday, Phung Quoc Hien, chairman of the Finance and Budget Committee, said six out of eight members in his panel agreed to have the tax threshold fixed at VND7 million.

"This level we are proposing is already six times higher than the current minimum wage," he said.

The new law on personal income tax is drafted based on the idea that living standard will improve and there will be more taxpayers so that income tax is not just a tax on high-income earners, Hien said. "Now we only have 3.8 million out of 51 million income earners paying the tax."

"We also take into consideration the fact that it will be more and more difficult to collect money for the state budget. By 2018, all tax barriers will have been reduced and revenues from land and oil will also fall due to exhaustion and the strategic plan is to collect more direct taxes."

The country will not have enough budget revenues if it follows the finance ministry's proposals, he told government officials and legislators.

Economist Le Dang Doanh said that the committee's concern about possible decreases in the state budget's income is "quite illogical," because most current taxpayers in Vietnam are subjected to the lowest tax rates, and the total taxes they pay account for the smallest percentage of total tax revenues.

The economist also suggested that overall a government should impose the lowest possible tax rate in order to encourage investment and raise tax revenues in the long run.

"It is a policy of nurturing the state budget income," Doanh said. "The National Assembly or the Ministry of Finance needs to have a long-term vision and consider the current situation where many people are still facing a lot of difficulties."

Official statistics showed that while the lowest tax bracket accounts for 73 percent of Vietnam's personal taxpayers, they contribute only around 10 percent of the total revenues.

In an interview with the VnExpress news website, Pham Chi Lan, one of the country's most well-known economists, said she was "bewildered" by the committee's proposals.

She said the committee should not be worried about the state budget's income, because Vietnam is reducing public investment, which would help compensate for losses caused by changes in the Personal Income Tax Law.

It has been calculated that between 2007, when the law first came into effect, and 2011, the dong's value has declined by some 70 percent, which meant that people's real income has already decreased a lot, Lan said.

"If agencies insist on such low income tax thresholds, I'm afraid that it would become outdated soon and would have to be adjusted again," she said.

Moreover, a recent report revealed by the National Assembly's Economic Committee pointed out that Vietnamese people are paying a lot of taxes and fees which are much higher than their incomes, the economist said.

Most of people's basic demands like accommodation have yet to be met, so tax policies need to let them improve their life and satisfy their right demands, Lan stressed.

Other proposals put forward by the National Assembly committee at the meeting also upset economists and legal experts.

For example, lawyer Nguyen Thai Son, director of Saigon Tax Consultancy Company, said he was shocked at the committee's proposal to restrict each taxpayer to two dependents.

He said such a restriction was "unacceptable" and totally not in line with Vietnamese's moral codes, because many people have more than two children and have to take care of their parents as well.

Lan agreed, saying that the proposal was "too weird and unreasonable."

According to the Finance Ministry's proposals for amendments to the Personal Income Tax Law, Vietnamese per capita income will be about VND2.8 million a month and per capita spending will be some VND2.75 million a month in 2014.


The Ministry of Finance last week rejected a report by the National Assembly's Economic Committee which concluded that Vietnam's tax-revenue-to-GDP ratio is 1.4 to three times higher than neighboring countries.

At a press conference on September 5, Deputy Finance Minister Vu Thi Mai said the comparison between Vietnam and other countries made by the committee's group of economic policy consultants was not on the basis of "same contents," local media reported.

She said while other countries' ratios did not include the incomes from crude oil and land use fees, Vietnam's ratio included these incomes.

Not to mention that other countries only calculated their central budgets' incomes, but Vietnam included the incomes of both central and local budgets, she said.

Therefore, Vietnam's tax-revenue-to-GDP ratio over the past 20 years should be between 12 and 14 percent, which can be considered as "average" compared to the world, the deputy minister said.

According to the committee's report revealed one day earlier, Vietnam's budget income was "quite stable," accounting for 29 percent of GDP between 2007 and 2011.

The incomes from taxes and fees were 21.6 percent, while the rest came from crude oil, it said, noting that the latter was decreasing.

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