State should simplify tax procedures to encourage business household conversion

State should simplify tax procedures to encourage business household conversion

According to a report by the International Labour Organisation (ILO), Việt Nam has approximately five million business households. However, only 1.7 million of these have registered as businesses and meet their tax obligations.

A small enterprise processing bird nests. The State should have suitable tax policies to encourage the conversion from business households to enterprises. — VNA/VNS Photo

To foster the conversion of business households into companies, experts suggest the Government should simplify how they declare their tax, along with easing accounting rules for their first three years of operating. 

Along with this, authorities should refrain from inspections during this initial period and offer a significantly lower tax rates to encourage smoother transitions.

Economic expert PhD Đinh Thế Hiển said that to effectively encourage business households to shift to becoming formal firms, the process needs to be more straightforward and a flexible tax model should be in place. 

At present, business households carry out the presumptive tax with a lump-sum tax declaration, meaning value added tax and personal income tax is calculated according to the presumed earnings. Enterprises are required to provide tax declarations for each kind of tax. 

Hiển proposes that business households should be allowed to experiment with operating as enterprises for a set period, without the full burden of legal constraints, allowing them to adjust to the new system gradually. This pilot phase would ensure that the converted enterprises are smoother and more effective after completing the conversion.

He also highlights that over the long term, as Việt Nam has stricter invoicing and registration regulations, the shift from business households to enterprises will be inevitable. This change would help create a more transparent business environment, providing a solid foundation for sustainable growth.

Chairwoman of the Việt Nam Tax Consulting Association, Nguyễn Thị Cúc, has emphasised the need for a fundamental overhaul of tax policies to make the conversion from business households to enterprises more feasible. 

At present, the business households enjoy a very low tax rate.

For example, in the commercial trading industry, the tax rate for business households is only 1.5 per cent, with 0.5 per cent being personal income tax and 1 per cent for value-added tax (VAT). 

In contrast, registered enterprises must comply with a more detailed tax regime, including VAT rates as high as 5 per cent, along with other taxes and regulatory compliance, such as insurance and labour safety regulations.

Given this tax discrepancy, Cúc has suggested that business households with annual revenues of up to VNĐ1 billion should be allowed to continue with lump-sum taxes, as their operations are often small-scale, providing income primarily for the household. 

For those with higher revenues, however, she has proposed adopting the declaration method with tax rates aligned with those of formal enterprises.

The Government’s goal of reaching one million enterprises has yet to be realised, and many business households remain hesitant to transition into formal businesses. 

Despite incentives and simplified procedures for setting up enterprises, many business households fear the burden of increased taxes, complex procedures, and the potential for more stringent tax inspections.

According to a report by the International Labour Organisation (ILO), Việt Nam has approximately five million business households. However, only 1.7 million of these have registered as businesses and meet their tax obligations, contributing only 1.6 per cent to the State budget. 

The remaining 3.3 million households are still unregistered, often due to the lower tax rates applied to them under the lump-sum tax system. Business households are concerned that transitioning to an enterprise would require full transparency and clearer tax reporting, which could result in higher taxes and administrative burdens.

Reducing the compliance burden, simplifying tax declarations and providing incentives during the early years of a business, can help foster growth in the private sector and encourage more business households to formalise their operations.

By addressing the tax disparities and creating a more conducive environment for micro-enterprises, Việt Nam can empower small businesses to thrive and contribute more effectively to the economy.

Given the vital role the private sector plays in economic growth, it is crucial for the Government to introduce new and innovative solutions that ease the transition for business households. 

Bizhub