Personal Income Tax Reform: Aligning with International Practices and Vietnam’s Realities

Reforming personal income tax (PIT) has become a critical focus to ensure fairness, promote economic growth, and reflect the real-life conditions of Vietnamese taxpayers. At a recent seminar titled “PIT Law: Ensuring Fairness and Promoting Growth” hosted by Lao Dong Newspaper on March 14 in Hanoi, experts discussed existing issues and proposed key reforms to improve Vietnam’s PIT system.

Ongoing Challenges in Current PIT Policies

According to Associate Professor Dr. Phan Huu Nghi, Deputy Director of the Institute of Banking and Finance at the National Economics University, PIT is one of Vietnam’s nine key taxes, contributing over VND 198 trillion in 2024—accounting for approximately 10% of total state revenue. However, PIT revenue has been increasing significantly faster than average per capita income, placing a growing tax burden on wage earners.

From 2020 to 2024, PIT revenue rose by 72%, while per capita income grew only 30.2%. This disparity highlights the need to adjust tax policies to ensure social equity and sustainable economic development.

Dr. Le Xuan Truong, Head of the Faculty of Taxation and Customs at the Academy of Finance, added that the current personal and dependent deductions are not flexible and fail to reflect actual living expenses. While the deduction levels may appear high relative to GDP per capita, Vietnam still imposes higher tax rates than neighboring countries.

Nguyen Thi Cuc, Chairwoman of the Vietnam Tax Consultants’ Association, pointed out that the narrow gaps between tax brackets impose a disproportionate burden on higher earners and fail to encourage highly skilled labor. She also noted that the current rules regarding dependents are outdated. For example, dependents earning over VND 1 million per month do not qualify for tax deductions, which is unrealistic given rising living costs.

Proposed Solutions for PIT Reform

To address these issues, experts propose raising the personal and dependent deduction thresholds. Dr. Le Xuan Truong suggests setting the deduction at 1.5 times the national GDP per capita to better support workers’ living standards. He emphasized that this would increase disposable income and improve taxpayer fairness.

Nguyen Thi Cuc recommended widening the gaps between tax brackets and eliminating the highest 35% tax rate to reduce the financial burden on high earners and create a more balanced tax system. She also advocated for more flexible rules for defining dependents, taking into account modern living standards and expenses.

In addition to structural tax reforms, transparency and modernization in tax administration are crucial. The current system—where taxes are withheld monthly but reconciled at year-end—causes inconvenience and potential loss for taxpayers. A more balanced and real-time collection method is needed.

Associate Professor Phan Huu Nghi emphasized that global trends in PIT reform focus on three key goals:

1. Reducing the tax burden on wage earners;
2. Improving vertical tax equity among income groups;
3. Expanding the tax base to align with the digital economy and globalization.

He also highlighted the importance of leveraging technology to manage income data, enhance transparency in tax refunds, and prevent tax evasion. These changes would improve tax compliance and state revenue without unfairly burdening workers.