Recent price escalations have rendered the Personal Income Tax (PIT) Law obsolete and in urgent need of broad revisions, experts say.
The government drew up the law in 2005-06 to replace the existing ordinance on high-income earners. The law was approved by the National Assembly, Vietnam's legislative body, in late 2007 and went into effect on January 1, 2009.
The PIT set a taxable income threshold that began at VND4 million (US$205) per month for both locals and foreigners working in Vietnam. It also allowed taxpayers to deduct VND1.6 million ($82) for each dependant.
Although the government considered economic growth and inflation rates when drafting the law, unexpected price hikes have made the statute outdated, experts say.
Vietnam's consumer price index (CPI) rose by 12.63 percent in 2007 and climbed by 22.33 percent in 2008 before slowing to 6.88 percent in 2009. The index reached 9.58 percent during the first 11 months of this year.
"During the years that the government spent drafting the Personal Income Tax Law the economy remained stable," said
Dr. Dinh The Hien, an expert in finance and investment, "However, the local economy has fluctuated greatly over the past four years.
"The PIT Law targets employees," he added. "Meanwhile, their salaries have not been raised in accordance with the hikes in consumer prices."
Many taxpayers have expressed exasperation with the low taxation threshold.
"As far as I am concerned, the threshold should be raised to VND5-6 million Dr. Nguyen Van Thuan, dean of the Faculty of Accounting, Finance and Banking at Ho Chi Minh City Open University. "In addition, when inflation rises by more than 20 percent [in a single year], the threshold and the level of dependent deductions should be re-calculated, accordingly."
One tax expert, who wished to remain anonymous, described the PIT law as a double-edged sword. On the one hand, it created dependent deductions. On the other, he claimed, it left tax authorities somewhat hamstrung in their ability to keep tax laws up to date.
Under the new law, he claimed, the government did not renew a stipulation allowing it to adjust the taxable income threshold in the event of high inflation or drastic consumer price hikes.
A "dependant" under the PIT law, cannot earn more than VND500,000 per month.
"In this market, who can survive on half a million dong?" asked Nam, an employee at a District 1 marketing firm in HCMC.
Nam's daughter is over eighteen. She's enrolled in a full-time course at a university in HCMC and only earns about a million dong per month at her part-time job.
Under current law, she's too old to be considered a dependent. But, Nam says, she depends on him to help her cover school fees and basic costs of living.
Many experts feel that the deduction system also needs to be updated. "The rate of VND1.6 million per month is not enough for parents to cover tuition fees as well as other living costs for each child," said Dr. Thuan.
Others have argued that the stipulated deduction of VND1.6 million for each dependant and the dependant's monthly income limit of VND500,000 make for a bad policy contradiction.
The deduction figure far exceeds the amount that a dependent can earn without being taxed.
A slender staircase
The PIT Law established seven tax levels in a progressive scheme. When taxable income hits VND5 million or less per month, tax is 5 percent. When monthly taxable income is between VND5 million and VND10 million, tax is set at 10 percent.
Tran Xoa, director of the Minh Dang Quang Law Company, says that the taxable income brackets are too narrow.
He provided the following example: A man in HCMC receives a monthly salary of VND10 million. If he has no dependants, his taxable income will be VND6 million (as the taxable income threshold is VND4 million). Thus, he has to pay 5 percent of VND5 million and 10 percent of VND1 million. In total, he will pay VND350,000 in taxes per month.
"It is relatively high," Xoa said.
Some other experts said the personal income tax is unreasonable compared to the corporate income tax.
The corporate income tax law requires businesses to hand over a quarter of their profits. Thus a company earning VND100 million pays VND25 million in taxes.
Meanwhile, a man with a VND100 million monthly salary is obliged to pay VND23.75 million according to the progressive tax scheme, regardless of how much he's earned or lost in that year.