Outdated family deductions

The family deduction of 11 million VND/month for regular income from salaries, wages and starting revenue subject to personal income tax for households and individuals doing business from 100 million VND/year is too low in the current context.

Up to now, although many proposals and recommendations on amending and supplementing the Personal Income Tax Law have been directly or indirectly reflected to the authorities, the amendment of this tax is still... in the future.

The reason is that, according to the law, if the Consumer Price Index (CPI) increases by more than 20% compared to the time of the most recent adjustment of the family deduction level, the Government will submit to the National Assembly Standing Committee to increase the family deduction level in accordance with price fluctuations. Because the CPI has only increased by 15.06% compared to the time of the most recent adjustment of the family deduction level (from VND 9 million to VND 11 million/month, effective from January 1, 2020), meaning it has not "reached the ceiling", the family deduction level remains the same.

However, if we base our family deductions on CPI, for the vast majority of people, it is forced and not suitable to reality.

Because this is the general price index of goods and services in the market, while essential goods, which account for most of people's income, have increased significantly compared to the beginning of 2020. For example, food prices increased by 33.28%; education services increased by 24.95%; electricity and water prices increased by 2 times in 2023 and will continue to increase...

Nominal income increased slowly while essential goods and services increased rapidly, so the real income of people decreased, negatively affecting domestic consumption. Domestic consumption even decreased if we do not count the consumption of 4.6 million foreign tourists to Vietnam in the first 3 months of this year and more than 4 million people born since the most recent family deduction adjustment.

Exports, public investment and consumption are considered the three main drivers of economic growth. While exports and public investment have been on track since the fourth quarter of 2023 and accelerated in the first quarter of this year, domestic consumption has yet to recover.

In the first 3 months of 2024, the country's export turnover increased by 17%, of which the domestic economic sector contributed over 25.2 billion USD, an increase of more than 26% - the highest increase ever. Disbursement of public investment capital reached 13.67% of the plan, an increase of 16,700 billion VND over the same period in 2023. Meanwhile, retail sales of goods and service revenue in the first 3 months of this year increased by only 8.2% (excluding the price increase factor of over 5%), half of that in the same period in 2023 and much lower than the average increase in the period 2015-2019 (increased by 11.5%/year).

Since the Covid-19 pandemic broke out, the National Assembly and the Government have introduced a series of unprecedented solutions to support businesses and people, and promote domestic consumption such as extending, exempting, and reducing most taxes, fees, land rents, reducing value-added tax rates from 10% to 8% for most goods and services with the desire to stimulate domestic demand..., but the domestic market has not yet recovered to the pre-pandemic level.

One of the main reasons for low domestic consumption is weak purchasing power due to slow income growth. It is estimated that workers' income in the first quarter only increased by about VND550,000 compared to the same period last year. This additional income is not enough to cover the cost of increased electricity prices, clean water, tuition, hospital fees, etc., so people cannot increase spending on other goods and services and of course, the market's purchasing power cannot recover.

The above situation shows that more drastic solutions are needed if we want to increase domestic consumption.

In the context of the weak purchasing power of the domestic market, the first solution is to stimulate consumption and increase the family deduction from salaries, wages and taxable income for households and individual businesses, which is the easiest solution to implement. Accordingly, it is only necessary to amend the only provision (clause b, Article 19) of the current Personal Income Tax Law in the direction that when the CPI increases by 15% or more, the Government will have the basis to submit to the National Assembly Standing Committee to adjust the family deduction in accordance with price fluctuations. In particular, the overall amendment of the Personal Income Tax Law can be implemented according to the roadmap.

To both ease people's burden and contribute to the development of the domestic market and to ensure that the family deduction level is not too far behind the price level, the Ministry of Finance needs to soon research and submit to competent authorities to raise the family deduction level to 15-17 million VND/month.

If the authorities do not act promptly to completely handle the above situation, many people will become increasingly poor because of taxes.

Source