Too little, too late

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Proposed income tax changes fail to excite inflation-weary citizens

A vendor sells produce at a market in Hanoi. Vietnamese taxpayers have been calling for amendments to the Personal Income Tax Law over the past two years, saying inflation has eroded their income.

A proposed amendment to the Personal Income Tax Law aims to increase the tax-free income ceiling but it has failed to cheer up taxpayers who feel the change is too little and comes a little too late.

Under the Finance Ministry's proposal, expected to take effect in 2014, the threshold for personal income tax will be raised to VND6 million per month from the current level of VND4 million. It means those with an annual income of VND72 million (US$3,450) will not have to pay income tax.

Taxpayers will also be allowed to set aside VND2.4 million per month for each dependent, compared to the current VND1.6 million.

But the announcement has not been warmly received by the public.

Media reports say many taxpayers are disappointed with both the quantum of increase in the ceiling, which they say is not significant enough, and the two-year wait before it takes effect.

"The people can't have peace of mind facing all these difficulties when their salaries are low but prices keep rising. But then the Finance Ministry wants to delay the change until 2014," reader Vu Thi Huong Giang wrote to Vietweek.

"Even if we had that change right now, it wouldn't really mean much, let alone having to wait for another two years," she said.

Nguyen Thai Son, former personal income tax director at the Ho Chi Minh City Tax Deparment, said the deductions before taxable income are still too low given that high inflation continues to have a negative impact on daily lives.

As consumer prices tend to rise faster than expected in Vietnam, the fixed tax-free income ceiling proposed for 2014 will likely become out of line with income when it starts to take effect, said Son, who now heads a consultancy firm in the city.

Over the past two years, Vietnamese taxpayers have been calling for amendments to the Personal Income Tax Law, which was approved in 2007, complaining that higher prices have taken a growingly large bite out of their income.

After inflation eased to 6.25 percent in 2009, it hit 11.75 percent in 2010 and then quickened to 18.13 percent last year. Since 2007, consumer prices have risen nearly 70 percent.

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Vietnam is targeting to keep inflation to single digits this year, but some experts have already warned that it would not be an easy task after a 10-percent increase in gasoline prices last week and a possible hike in electricity tariffs later this year. Prices rose 16.44 percent in February from a year earlier.

Lawyer Tran Xoa, director of Minh Dang Quang, a law firm in HCMC, said he has been calling for a new tax-free income ceiling that is calculated based on the minimum wage applicable at the time of tax payment. He suggested the ceiling be set at eight to ten times the minimum wage.

"If the amendment only aims at increasing the deductions to new fixed levels like this, the situation of a policy being out of step with reality will happen again," he said.

Vietnam's minimum wage was raised last October to between VND1.4-2 million ($67-96) a month, depending on the region. The previous increase was in January, when the level rose to between VND830,000 and VND1.35 million.

Economist Nguyen Minh Phong agreed that the threshold for personal income tax should be based on the minimum wage, which is revised regularly in accordance with inflation.

"That would be a better option"¦ It will meet two goals at the same time it suits real lives better and it is easy to apply too," he said. "Everybody will have a different idea, but policy makers should really listen to opinions to make sure a new law is not out of date when it is introduced."

According to the Ministry of Finance, the 2014 deadline will allow it more time to prepare for guidelines and technical transitions.

Both Son and Xoa told Vietweek that the changes proposed by the ministry were not complicated enough for such a long time of preparation. Just some minor tweaks to computer software can solve all the problems for tax agencies, they said.

Apart from a larger tax-free income proportion, the Finance Ministry also plans to remove the current maximum tax rate of 35 percent imposed on any taxable income portion that exceeds VND80 million.

On the remaining taxable income after all deductions, the tax rate will progressively increase, from 5 percent to 30 percent.

This is where experts find another problem. Son said instead of changing the highest tax rate, which only affects top income earners in the country, it is more important to change the rules and move taxpayers to lower tax brackets. That would have a much bigger impact, he said.

The proposed changes will lead to a reduction of VND9.25 trillion ($444.5 million) in tax revenues, news website VnExpress reported last week, citing the Ministry of Finance. The report did not say how many taxpayers would benefit from the changes.

Vietnam had issued nearly 15.9 million personal tax codes as of the end of 2011.

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