PIT revenue moves faster than per capita income

The personal income tax (PIT) is one of Vietnam’s nine major taxes which last year contributed an estimated VND198 trillion to the state budget, or about 10% of the total revenue.

Assoc. Prof. Dr. Phan Huu Nghi, deputy director of the Institute of Banking and Finance at Hanoi National Economics University, said that PIT revenue has grown significantly faster than per capita income over the past few years.

He cites data compiled from 2020 to 2024 showing that total PIT revenue increased by 72% from VND115 trillion to VND198 trillion, while per capita income rose by only 30.2% from US$3,548 per year to US$4,622 per year. At the same time, inflation averaged 0.81% to 4.16% annually, with a cumulative rate of 12.58% over four years.

When adjusting for inflation, the real purchasing power of income has not increased as much as nominal figures suggest. This means that taxpayers are paying significantly more while their real earnings have not increased proportionally.

Indeed, Vietnamese personal tax deduction stands at VND11 million per month, with a dependent deduction of VND4.4 million per month per dependent. Progressive tax brackets range from 5% to 35%, with middle-income earners facing a high tax burden at relatively low income thresholds.

Assoc. Prof. Dr. Nghi argues that PIT rates should reflect real income changes to maintain fairness. He therefore suggests increasing tax deductions in line with inflation and cost of living, alongside revising the progressive tax structure to prevent overburdening middle-income earners.

Meanwhile, Assoc. Prof. Dr. Le Xuan Truong, head of the Tax and Customs Department at Hanoi Academy of Finance, points out that Vietnam’s personal tax deduction is 50% higher than Indonesia’s, despite similar GDP per capita levels (US$4,700 in Vietnam compared to US$4,981 in Indonesia).

Globally, he notes that tax deductions are typically linked to essential living expenses in a bid to ensure that after-tax income allows taxpayers to maintain a standard of living above the poverty line.

“PIT should therefore be calculated based on real disposable income, ensuring that taxpayers can cover basic living expenses before taxation is applied,” he emphasises.

Taxable income threshold needs adjusting

Analysing the issue, Assoc. Prof. Dr. Nghi states that tax deductions are a crucial aspect of the personal income tax system as they directly impact the number of taxpayers and the amount of tax payable.

Currently, when assessing taxable income, it can be viewed as essential to consider the necessary expenses incurred to generate that income. These include daily living expenses such as transportation, food, and labour reproduction costs, as well as past expenses such as education and training costs that enabled individuals to secure their jobs and earn their current income. However, the existing tax system may not fully reflect these factors, leading to an unfair taxation burden on workers.

“The current family circumstance deduction is uniformly applied nationwide, regardless of the differences in living costs across provinces and cities. This creates an issue where people living in Hanoi or Ho Chi Minh City, where the cost of living is significantly higher, still receive the same deduction as those in other provinces,” says Dr. Nghi.

He therefore suggests that statistical data on income distribution among workers should be made. According to current estimates, the income group ranging from VND18 million to VND23 million per month, equal to approximately US$8,400 to US$10,500 per year, accounts for the largest proportion of the workforce. When formulating tax policies, it is crucial to determine what level of income should be considered high and thus subject to taxation.

“If the high-income threshold is set incorrectly, middle-income workers, who make up the majority of the labour force, may also be subjected to high tax rates, placing significant financial pressure on them,” explains Dr. Nghi.

He further argues that taxation should be applied above the income level where the majority of earners are concentrated.

“The threshold for high-income taxation should be adjusted to VND20 million to VND25 million per month to accurately reflect income realities and avoid over-taxing middle-income earners. This will ensure stability over time while focusing tax management on the ultra-rich,” he proposes.

Regarding the current PIT tax brackets, which range from 5% to 35% with seven different tiers, Dr. Nghi notes that the tax brackets are too dense, and the gaps between them are too narrow, resulting in a sharp increase in tax rates and the amount payable even in the event that income rises only slightly.

“This situation causes middle-income earners to quickly fall into higher tax brackets, creating financial strain and reducing their motivation to work,” he stresses.

Dr. Nghi suggests that a reasonable tax reform approach would be to adjust the gap between tax brackets. Expanding the distance between tax tiers using a reasonable coefficient would create a more stable tax system with greater flexibility. This in turn would encourage income growth while preventing the unreasonable taxation of middle-income workers.

“The number of tax brackets could be reduced from seven to five, simplifying the tax calculation system while still ensuring reasonable revenue for the state budget. This would not only create a fairer taxation system for different income groups but also encourage workers to increase their income without fearing excessive taxation,” Dr. Nghi recommends.

Ministry yet to consider adjusting family tax deduction rate now

VOV.VN - The Ministry of Finance has said it is not the right time to adjust the family tax deduction rate, reasoning that the Consumer Price Index has not fluctuated significantly.