Tax exemption threshold of 500 million VND/year for business households and issues to be considered reasonably

The adjustment of tax policies for business households and individuals is always a brainstorming problem for policymakers: it must ensure fairness, avoid creating a burden on vulnerable groups, and at the same time not erode sustainable revenue for the budget. In the context that Vietnam is promoting the process of tax transparency, modernizing management and encouraging digitalization, raising the tax exemption threshold for business households to 500 million VND/year is considered a concession step to reduce financial pressure, encourage the legalization of operations and create room for business households to reinvest[1]. However, the "simplification" with a common number raises many practical issues that need to be discussed. Is the threshold of 500 million VND, if applied "mechanically", suitable for the characteristics of the industry, household structure and regional differences, or is it necessary to have complementary mechanisms for the policy to achieve the desired effect?

Source: National Assembly. 

1. The nature of the selection of the duty-free threshold

First of all, it is necessary to clarify the nature of the proposal. Raising the tax exemption threshold is not a pure act of reducing revenue; It is a way for the State to create conditions for business households to retain part of their income to reinvest, modernize and gradually enter the formal economic sector. When combined with the right to choose a tax calculation method, either as a percentage of revenue or by actual income (revenue minus expenses), this proposal reflects a fairer approach than a revenue-based tax calculation method. However, the effectiveness of the policy depends heavily on the enforcement mechanism, the deduction regime, and the accompanying transformation support measures.

2. Factors to consider

2.1. Family circumstance deduction

In terms of social justice, an effective tax policy must take into account the size of family labor. Business households are fundamentally different from enterprises because the labor resources are usually family members, who are not paid official salaries. When only considering revenue or profit before tax, the policy ignores the "dependent burden" factor of each household. Two households have the same after-tax profit but one household has to feed many members with no income while the other does not, the actual ability of living standards and the ability to reinvest are different. If there is no mechanism for family circumstance deduction or equivalent adjustment for business households when applying the income-based tax calculation method, the policy will be unfair. Therefore, to fix the taxable threshold of VND 500 million, the tax administration agency needs to supplement regulations on appropriate family circumstance deduction for business households or a flexible exemption and reduction mechanism depending on the number of dependents proven.

2.2. Specificities of the industry

Next, the specifics of the industry must be analyzed. Revenue does not reflect the added value or profit margin evenly between industries. Business households operating in the service industry with low input costs such as retail, snacks, and personal care services often have higher profit margins than households producing crafts, craft villages, food processing or mechanical processing, where the cost of machinery, etc  raw materials and depreciation account for a large proportion. The imposition of a common revenue threshold regardless of industry can lead to the paradox that production households, which contribute a lot to the industrial value chain, but due to low profit margins, are classified as taxable earlier than high-profit service households. As a result, the policy may inadvertently reduce the capacity to reinvest in small manufacturing industries, harming domestic supply chains and supporting industry development goals.

2.3. Differences in administrative boundaries

Regional issues cannot be taken lightly. Business operating costs in large cities such as Hanoi or Ho Chi Minh City. Ho Chi Minh City is significantly different from rural areas or provinces. The cost of premises, labor, transportation, and many other indirect costs significantly reduce the ratio of profit to revenue of households in urban areas. A restaurant in the central area can achieve revenue exceeding 500 million VND, but the net profit is still low due to high rental costs. If the same threshold is applied nationwide without regional adjustments, the policy will cause business households in large cities to suffer more, leading to the phenomenon of "profit bankruptcy" and reducing the momentum for modernization in places that require higher governance capacity. Therefore, a zoning mechanism, similar to the regional classification applied in the minimum wage, would be more reasonable than a fixed national threshold.

Local residents and small traders at the Can Tho Old Market conducting transactions. Source: The Saigon Times

3. The impact of the tax exemption threshold and solutions the State should consider

Macroeconomic impact assessment shows that raising the tax exemption threshold if not carefully considered can affect budget revenues. While reducing tax liability for business households in the short term is beneficial to micro-growth and small business stability, if the threshold is expanded too broadly without a compensation mechanism, local budgets may fall short of the revenue needed to provide critical public services. Therefore, the calculation of the threshold must simultaneously consider the following factors: the size of the business household area, the percentage of officially registered households, the expected benefits from the increase in revenue after households switch to using e-invoices and full declaration, and calculate the impact on budget revenue in the short and medium term.

Administratively, the policy of raising the threshold accompanied by the choice of tax calculation method will increase the requirements for tax administration capacity. When many households have the right to choose the method of calculating according to income, the tax authority needs to have a system of guidance, accounting templates and an appropriate audit mechanism to avoid cost fraud. Without adequate resources prepared for auditing, monitoring, and support, the expansion of income-based calculation can increase the risk of tax evasion through false expense reporting. Therefore, along with the policy, it is necessary to have measures to support book management for households, including training programs, simplified book forms, and a system to support the digitization of declarations.

Another important point is the link between the tax exemption threshold and the policy of encouraging digitalization. The state is currently promoting business households to use e-invoices, an important step to make revenue and cash flow transparent. If the tax exemption threshold is too low, households will lack the motivation to invest in the software, equipment and administrative processes necessary for e-invoices. On the contrary, if the threshold is high enough for households to have financial space to reinvest, they will be more likely to accept digital transformation. However, a threshold that is too high can slow down the expansion of the declaration area and increase the situation of tax "shifting". Therefore, the policy should incorporate technical incentives, reduced origination fees for e-invoices, and a mandatory step-by-step roadmap to encourage synchronization in both tax and governance.

From a social perspective, raising the tax-free threshold is a tool to reduce poverty and improve social security if designed correctly. Especially for micro households and low-income rural households, tax exemption helps them retain their income to improve their lives. But without a mechanism to control and assess the impact, this benefit may be affected by the phenomenon of "hidden income" when households deliberately do not fully declare revenue to be below the threshold. Therefore, in parallel with raising the threshold, it is necessary to strengthen the mechanism of market management, inspection and data linkage between tax authorities, customs, banks and e-commerce platforms to increase the efficiency in detecting discrepancies between actual activities and tax declaration.

In our opinion, the immediate application of the threshold of VND 500 million as a starting level as approved by the National Assembly, and at the same time designing supplementary measures such as applying family circumstance deductions for business households declaring by income, zoning the threshold by geographical area, classifying by industry with accompanying cost coefficients, etc  and offer a digital transformation roadmap with free technical assistance or subsidies for the first 1-3 years. Monitoring mechanisms should prioritize support for increased compliance rather than immediate administrative penalties; that is, taking time to guide and support households to get used to the new declaration regime, then establish a risk audit mechanism to review abnormal cases.

Regarding policy recommendations, what needs to be done in the immediate future includes planning policy pilots in a number of localities representing large cities, economic centers and rural areas. At the same time, assess the impact within 12–24 months to collect data on growth, declaration level, conversion rate to e-invoices and impact on revenue; then decide to expand or adjust the threshold. At the same time, it is necessary to prepare a technical support system for business households, including a simple bookkeeping toolkit, training programs, a declaration support portal and an online contact channel with the tax authority. It is impossible for business households to swim by themselves in a new legal environment without practical guidance from the management agency. At this time, the State's policies are really "drilling the people's strength" as the policy wants to aim for.

In conclusion, the tax exemption threshold of 500 million VND/year is a necessary step forward in the context of supporting business households to overcome difficulties and adapt to transparency requirements. However, if only a stereotypical number is applied across the entire territory, the policy risks missing practical differences between industries, labor sizes and regional costs. In order to ensure the goal of both supporting the development of the small economy and ensuring revenue for the budget, lawmakers need to design a multi-dimensional policy framework: flexible threshold by region, mechanism for family circumstance deduction for households, classification by sector with reasonable cost coefficients,  digital transformation roadmap with technical support, and a pilot and evaluation mechanism before expanding nationwide. Only then, taxes will no longer be a burden to prevent development but become a tool to promote business households to enter the stage of professional, transparent and sustainable governance.