Increase family deduction when calculating personal income tax

Increase family deductions to compensate for inflation

On the afternoon of February 28, the Ministry of Finance provided information related to the Draft Resolution of the National Assembly Standing Committee on adjusting the family deduction level of personal income tax.

Specifically, the Ministry of Finance has just asked for opinions from ministries, branches, localities, and the business community, and posted on the Government's and the Ministry of Finance's electronic information portals to widely solicit opinions from relevant organizations and individuals on the draft Resolution of the National Assembly Standing Committee on adjusting the family deduction level of personal income tax to complete the dossier and send it to the Ministry of Justice for appraisal.

Accordingly, Clause 4, Article 1 of Law No. 26/2012/QH13 amending and supplementing a number of articles of the Law on Personal Income Tax stipulates: "In case the consumer price index (CPI) fluctuates by more than 20% compared to the time the Law takes effect or the time of the most recent adjustment of the family deduction level, the Government shall submit to the National Assembly Standing Committee an adjustment of the family deduction level prescribed in this Clause in accordance with price fluctuations to apply to the next tax period.".

According to data provided by the General Statistics Office, the CPI index at the end of December 2019 compared to July 1, 2013 increased by 23.2%.

Based on the above regulations, the Ministry of Finance finds it necessary to study and adjust the family deduction level (GTGC) of personal income tax (PIT). Therefore, the Ministry of Finance has widely consulted with ministries and branches to submit to the Government a Draft Resolution on adjusting the family deduction level of personal income tax,Applicable from tax period 2020.

According to the provisions of the Law on Tax Administration No. 38/2019/QH14, effective from July 1, 2020, the deadline for finalizing personal income tax in 2020 is no later than the last day of the third month from the end of the calendar year or fiscal year; for personal income tax finalization dossiers of individuals directly settling tax, the latest is the last day of the fourth month (from the end of the calendar year). Therefore, in cases where tax has been temporarily paid according to the old VAT rate (VND 9 million/month for taxpayers and VND 3.6 million/month for each dependent), the amount of personal income tax payable will be determined according to the new VAT rate when finalizing personal income tax in 2020.

It is expected that the adjustment will increase the deduction for the taxpayer himself to 11 million VND/month {1,232 (x) 9 million VND = 11,088 million VND, rounded to 11 million VND)}, corresponding to 4.4 million VND/month for each dependent {1,232 (x) 3.6 million VND = 4.4352 million VND, rounded to 4.4 million VND}.

Reduce budget revenue, but reasonable for the whole

The Ministry of Finance also calculated the impact of adjusting the personal income tax rate. For taxpayers: The adjustment to increase the personal income tax rate (for taxpayers from VND 9 million/month to VND 11 million/month; for dependents from VND 3.6 million/month to VND 4.4 million/month) will help reduce difficulties for taxpayers in the context of increasing prices and inflation compared to 2013. The amount of tax payable will be reduced for all taxpayers, in which the reduction in the amount of tax payable for taxpayers at the lower tax rate will be higher than that of taxpayers at the higher tax rate.

For example, according to current regulations, a person with an income of up to 15 million VND/month (with 1 dependent) must pay tax at the rate of 120,000 VND/month (0.8% of income), but according to the new GTGC rate, they will not have to pay tax. A taxpayer with an income of up to 20 million VND/month (with 1 dependent) according to current regulations pays personal income tax of 490,000 VND/month (equivalent to 2.5% of income), but according to the new GTGC rate, they will pay personal income tax of 230,000 VND/month (1.2% of income), a reduction of more than 48% of the tax payable compared to the current rate.

As for high-level taxpayers, for example, a person with an income of 70 million VND/month (with 1 dependent), currently paying tax at the rate of 11,370,000 VND/month (16.2% of income), when switching to the new VAT rate, the tax payable is 10,530,000 VND (15% of income), a reduction of about 7% of the current tax payable.

For society, the adjustment to increase the level of VAT will ensure the implementation of the policy goal of reasonable and fair incentives, contributing to improving the lives of taxpayers, creating motivation to encourage all individuals to work hard, produce and do business, increase income and get rich legitimately; ensure simple, clear and transparent policies, promote administrative reform, improve the efficiency of tax collection management, and compliance with tax laws. The increase in the level of VAT also contributes to reasonable regulation of income, contributing to social justice, and limiting the gap between rich and poor.

Regarding the economic effects on society, it can be seen that the adjustment to increase the personal income tax rate has a positive effect. The reason is that the adjustment to increase the personal income tax rate leads to a reduction in personal income tax obligations or an increase in disposable income (income after paying taxes) of individuals, thereby stimulating an increase in household spending, increasing social consumption, contributing to promoting economic growth. However, the level of impact on economic growth is also related to the reduction in government spending due to a decrease in budget revenue from personal income tax.

Regarding the state budget, according to data on the centralized system of the tax sector in 2019, the number of people paying personal income tax from salaries and wages reached about 6.89 million people with a total state budget revenue of over 79,219 billion VND. If the deduction level is applied at the expected level of 11 million VND/month for the taxpayer himself and 4.4 million VND/month for each dependent, a large number of taxpayers at level 1 will switch to non-taxable status, similarly, taxpayers at the remaining tax levels will have their tax payable reduced, thereby reducing the state budget revenue to about 68,921 billion VND. Thus, with the above proposal to increase the personal income tax rate, the annual personal income tax revenue will decrease by about 10,300 billion VND (equivalent to a decrease of about 13% of the budget revenue from personal income tax in 2019).