New circular kicks individuals out of tax exemption

Laws - Many people eligible for the National Assembly’s personal income tax exemption in the last five months of the year are now unlikely to benefit from the incentive, thanks to a new circular issued by the Ministry of Finance.

Under the NA’s Resolution No 8, individuals whose average taxable income in the period between August 1st and December 31st is less than VND5 million will be eligible for the tax exemption.

However, in the Ministry of Finance’s new circular to provide guidance on the calculation of taxable income to apply the exemption, the taxable income must have its calculation based on the average of all 12 months of the year, rather than the last five months, as stipulated by the NA’s resolution.

With such a calculation, many individuals will no longer be eligible for the tax incentives.

Experts said the calculation based on the average income over 12 months will be more disadvantageous for taxpayers than the average of five months.

In the first months of the year, people usually have higher incomes, especially in January and February, when they receive bonuses for the Tet holiday, experts said.

Thus, if the taxable income is calculated based on the 12-month average, many individuals will not have their taxes exempted despite having the average five-month income less than VND5 million.

According to Tran Xoa, lawyer at the Minh Dang Quang law firm, many organizations and companies have followed the NA’s resolution on the tax exemption to not collect taxes from the individuals who fell under the category stipulated by the NA.

“Now with the new circular from the Ministry of Finance, these individuals will have to pay their tax arrears,” Xoa said.

“This is not fair, since the tax exemption is aimed to assist individuals in the last five months of the year, when the economy usually encounters trouble.”

Xoa said the Ministry of Finance’s calculation has reduced the rights of taxpayers.

Meanwhile, the organizations and companies are further perplexed by the new circular since they have not collected taxes of their laborers and employees, according to the NA’s Resolution No 8.

“Many individuals subject to the tax arrears collection have already left their jobs, so who will pay the arrears?” Xoa said.

The difference between the two taxable income calculations

Given an individual has personal income of VND10 million a month in the period between January and July, and VND9 million a month in the last five months of the year.

If the five-month average taxable income is counted, he will only have to pay tax for the first seven months of the year, which is VND350,000 a month with the taxable income of VND6 million a month.

The taxable income in the last five months will be VND5 million a month, thus subjecting him to the tax exemption.

This means the entire tax he has to pay is VND2.45 million, which is the total tax in the first seven months.

Meanwhile, with the 12-month average calculation, the individual will have average income of VND9.58 million, and average taxable income of VND5.58 million, which result in a tax of VND308,000 a month, or VND3.69 million for the whole year since it exceeds the VND5 million limit on taxable income to be eligible for the exemption.

This means the tax difference will cost him VND1.24 million.