Smaller businesses in line for tax reduction policy

The Ministry of Finance (MoF) is collecting comments on the draft Law on Corporate Income Tax (CIT), and has proposed to reduce the income tax of micro, small, and medium-sized enterprises (MSMEs) to 15-17 per cent depending on the revenue of the previous year, instead of the current 20 per cent.

Mechanical enterprise Intech is planning to develop more loading and unloading robots and smart warehouses because the market demand is increasing. However, capital is a headache for them to update new technologies and equipment, and they are waiting on the CIT reduction.

There are about 800,000 businesses at present in Vietnam, but the country is aiming for around two million by the end of the decade, Photo Le Toan

Intech CEO Hoang Huu Yen said, “If the CIT or land taxes can be cut down 2-3 per cent, businesses will have more capital for production activities, and wages of employees.”

CIT support is also an urgent need for startup businesses because they are building their company and searching for markets.

“If the CIT goes down to 10-15 per cent, it will be favourable for businesses in the short term. Moreover, we also want some more support like cutting down VAT, paying VAT in timelines, maybe half of VAT amount first and the remaining paid during next few years at a preferential interest rate,” said Nguyen Van Tuyen, founder of Trevi – a startup specialising in manufacturing bamboo bicycles and sports bikes.

Experts said that Vietnam’s CIT at 20 per cent is at the average level in the ASEAN region. Along with rescheduling and postponing tax payments, reduction of CIT for MSMEs should be carried out to encourage more newly established businesses.

BIDV chief economist Can Van Luc said, “The actual revenue from CIT may see a slight decrease, but households will be encouraged and promoted to develop into enterprises, they will pay more taxes, and tax evasion will be mitigated. This is a practical policy to support MSMEs.”

Additionally, to encourage business households to convert to enterprises, the draft of the law proposed adding preferential policies on CIT for MSMEs established from business households. Specifically, they will be exempted CIT for two consecutive years from the date of taxable income. This policy is equivalent to the tax exemption for new projects in some welcomed industries or in areas with difficult socioeconomic conditions.

Currently, there are about 5.5 million household businesses across the country, including about 3.5 million with tax codes and more than two million smaller.

Nguyen Ngoc Tu, lecturer at Hanoi University of Business and Technology, said there are about 800,000 businesses at present.

“To have one million businesses across the country, we need additional incentives to encourage household businesses to become registered enterprises. However, this policy is not sufficient because household businesses apply a simple accounting regime, without books, invoices or documents, and applies presumptive taxes,” said Tu.

“In the first years of operation for a typical business, investment costs are often high, tax declarations are often losses, and tax payments are low. Therefore, the CIT exemption for them is not meaningful in the decision to convert from household business to enterprise.”

Tran Xoa, director of Minh Dang Quang Law Firm, commented that the two-year CIT exemption will contribute to promoting and encouraging household businesses to become enterprises quickly.

“Currently, most transactions are made by bank transfer, so it is easy for tax authorities to see the annual revenue of enterprises. Therefore, it is harder for household businesses to hide revenue and pay very tiny CIT now, and it is easier for them to consider becoming bigger,” Xoa said.

Experts said that most MSMEs now were grown from household businesses. Becoming an enterprise is a certain trend, and businesses can enjoy many benefits, like deducting expenses before calculating taxable income, deducting VAT, two-year CIT exemption, then applying low CIT at 15-17 per cent instead of 20 per cent like businesses today.

In the draft law on CIT, the MoF also aims to support MSMEs properly, and right targets to achieve the highest socioeconomic benefits without spreading out, and reducing the effectiveness of the policy.

Resolution No.45/NQ-CP dated March 2023 aimed to develop private companies to become an important driving force of the socialist-oriented market economy, striving to have at least 2 million businesses by 2030.

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