Definition Personal income tax (PIC) is the direct tax levied upon real income of an individual periodically such

as annually or monthly to contribute to the budget irrespective of occupation and social statue. Basing on the characteristics, income is classified as regular income and irregular income so that each kind of income can have a suitable tax method. Personal tax was first invented in England in 1799 as a contemporary means to support the war between the country and France and in 1942 it was officially legislated. Later on, many countries followed England and adopted this tax such as Japan (1887), Germany (1899), USA (1903), France (1916) and Soviet Union (1922). According to a statistic by ERNST & YOUNG there are more than 136 countries applying PIC in the world. Due to the WTO participation and the global integration, reduction in import and export tax is unavoidable. With the development of our country, PIC revenue is on the increasing and becoming one of the most important sources of revenue for the Governments budget.

History of Personal Income Tax PIC was first applied in Vietnam in 1991, but throughout 22 years, it only accounts for about 2% of the total Governments revenue. TOTAL GOVERNMENT 'S REVUE 123.860 152.274 190.928 228.287 279.472 315.915 416.783 442.340 558.158 PERSONAL INCOME PERCENTAGE TAX (%) REVENUE 2338 2951 3521 4234 5179 7422 12940 14329 26288 1,89 1,94 1,84 1,85 1,85 2,35 3,10 3,24 4,71

YEAR

2002 2003 2004 2005 2006 2007 2008 2009 2010 -

According to the table we can see that the total revenue obtained from Personal Income Tax is still low comparing with the average percentage of about 40%-50%

of other countries (America: 45%, UK: 33%, Japan: 40%...). However, on the bright side, the amount of PIC in the national budget has increased gradually comparing to the 63 billion VND in 1991 (0.63%). During 22 years, the threshold for tax payer has been adjusted 5 times, increasing from 500.000 VND/month (in 1991) to 5.000.000 VND/month . The applicable tax rate is also reduced from 80% to 72%, then to 65%, 40% and 35% as stipulated in the current Personal Income Tax Law. Throughout the world, average Personal Income Tax in ASEAN: 5-10%, in developed countries is 15-16% and some countries for example England, America is 30-40%, we can see that our tax rate is still high.

Characteristic of Personal Income tax Personal tax income is an obligation stipulated by law. Personal income tax is one-sided contribution, the tax payer cannot expect service in return by offered by the Government. Personal tax income is a direct tax: the tax payer is also the one who suffers the tax burden. Personal tax income has a wide coverage including all individual with income within the nation territory: permanent resident, foreigners who regular or irregular reside in Vietnam Personal tax income is calculated based on progressive method for the purpose of equity in the society: the richer people are the more they have to pay.

Purpose of Personal Income tax To the economy and society The most important and salient purpose of personal income tax in specific and tax in general is to generate budget for public service and operation as well as maintaining equity in the society. To regulate the economy: the tax rate will directly affect the saving and spending habit of an individual, therefore, the production activity within the economy will be affected. To identify illegal income: personal tax income can help the authority to trace out money laundering, corruption, smuggling or tax evasion

To the tax system

To complement some weakness of other taxes: Some indirect taxes such as VAT, excise tax have weakness of regressive tax calculation, thus the tax burden is borne more by the poor than on the rich for example tax will be the same when people consuming the same kind of tax without concerning about income. To reduce the loss of corporate tax: There is always a close relationship between personal income tax and the corporate income tax. When the corporation and its employee conspire to boost the salaries to reduce the taxable income for tax avoidance purpose, the personal tax income will make up the loss by levying tax on such increased income.

Some improvement in Personal Income Tax Comparing to the Decree 100/2008/N-CP the Decree 65/2013/N-CP has made the following amendments

Applicable entities Increase the counting period from 90 to 183 days in considering residence period (b,2, Article 2, Chapter 1). However, foreigners who lodge in Vietnam under 183 days but cannot prove the identity will be considered as residing in Vietnam.

Taxable income Supplement some regulation about allowances, subsidies which are eligible for exemption such as allowances for medical purpose transferred from employer to the workers and workers relatives (spouse, parents, children), subsidies for round-trip airplane ticket for people working abroad or for foreigner working in Vietnam to visit their home countries one a year, subsidies for tuition fee from nursery to high school for children of Vietnamese employee working abroad (b, 2, Article 3, Chapter 1). Previously the Circular 62/2009/TT-BTC only allowed exemption for tuition fee at high school level. Adding 10% tax rate to the amount of accumulated insurance and voluntary pension fund (d, 2, Article 3, Chapter 1). Authorization of land or assets: if the authorized parties can have the right to transfer assets or having the same right as in the asset transfer relationship, the authorization will be considered transferring of assets

Income which is tax exempt

Supplementing the requirement of owing only one residential house or residential land block, income from transfer of right to use residential land and the assets attached to the second land will also be exempted from taxable income if only individual possesses the second land for a period shorter than 183 days (2, Article 4, Chapter 1). For residential house, construction which are under constructed: transferring, inheriting of receiving gift of such assets from relatives are also exempted. (1, Article 4, Chapter 1) Income paid by voluntary or foreign Pension Fund is exempted from tax (10, Article 4, Chapter 1) Income being scholarship: scholarship for subsistence expenses are exempted from tax (11, Article 4, Chapter 1)

Tax deduction For insurance expenses: premium paid to voluntary unemployment insurance or Pension fund is deductible from assessable income, the maximum level for deduction is 1 million/month, 12 million/year (1, Article 21, Section 1, Chapter II) Deduction for family circumstances: the deduction for family circumstances is increased from 4 million/month to 9 million/month (108 million/year); the deduction level for each dependant increase to 3.6 million/month. The income to identify dependant is increase from 500.000 to 1.000.000 (Article 19, Section 1, Chapter II) Dependant: dependants can be offspring, stepchild, offspring over 18 years old but still studying at high school, step father, step mother, legal foster father, legal foster mother.

Tax rate Tax rate applicable to transfer of stock ownership to 20%

For taxable income winning from Casino On the condition that the organization, casino cannot assess the income of the winning party for tax deduction purpose, the Casino will pay the tax proportionally to the amount of the prize comparing to the total prize on behalf of the winning party.

Implementing and controlling Personal Income Tax

Register tax: Individuals have to register to get the tax code from tax authority for themselves and for tax dependant. Thus, the amendment of Personal Income tax represents the respect of Government to the citizens opinion, increases transparence of tax system, reduces bureaucratic procedures and advances quality, effectiveness of Tax controlling authority.

Some weakness of Personal Income Tax PIC only accounts for a small proportion of the national budget. This fact undermines the role of this tax in the Governments policy, contrary to the world trend. PIC does not protect equity in distribution income in the economy: PIC stipulate the discrimination of tax payer between Vietnamese tax payer and foreignersthe threshold for beginning paying tax is different, and the difference is profitable for the foreigners. This regulation is not in accordance with the world standard and is unfair as Vietnamese and foreigners are all tax payers. Nowadays, personal income usually comes from human labor, business activity, direct and indirect investment, asset transfer..Among them, income from human labour, business activity, and asset transfer all have different tax rates. Personal income from indirect investment such as interest on deposit, yield on Governments bond is still exempted from tax, while income from transfer asset (stock or real estate) does not belong to taxable object. This reality raises the question of equity, effectiveness in executing PIC in Vietnam. The maximum tax rate of 35% is not encouraging enough to stimulate high qualified people participating into our workforce. Many countries in the world has tried hard to cut tax to attract investment and labour such as Indonesia, Malaysia, Singapore, Czech RepublicEspecially some countries have replace progressive tax system with flat tax rate: Russia 13%, Czech 15% and Bulgaria 10%. Therefore, abolishing 35% tax rate and retain only 6 scale for calculating tax is worth considering. Comparing to the Corporate tax rate of 25% the PIC tax rate is quite high, this will have some bad effect on the economy.