What Is VAT Deduction? Which Costs Are and Aren't Deductible

Vũ Khôi

Author at Wotech Electronics Blog

Besides paying tax, deducting value-added tax (VAT) is also an important operation. VAT deduction helps prevent tax from being collected twice. To deduct VAT, a business must firmly grasp the deduction principle: output VAT minus input VAT. However, not all input VAT is deductible — only activities that meet the requirements of the Tax Law can be deducted. Businesses therefore need to master the regulations to carry out VAT deduction procedures correctly.

What is VAT deduction?

What is VAT deduction

Value-added tax deduction, also called VAT deduction, is the operation by which a business determines the VAT payable by subtracting input VAT from output VAT. In essence, when importing goods, the business pays input VAT on those goods, and then when it sells products to the market, the customer pays output VAT. Deducting VAT resolves double taxation on the same goods. In addition, the deduction reflects the true nature of VAT, since the principle of VAT deduction is to tax the final consumer, not the business.

VAT deduction regulations

VAT deduction, like other tax operations, must comply with the state's strict regulations. The VAT a business must pay is calculated by subtracting input VAT from output VAT. Output VAT is the total VAT collected on the goods the business sells, as shown on VAT invoices. Input VAT is the total VAT shown on the invoices for goods purchased. However, not every business can apply this calculation method — only businesses taxed under the deduction method may do so. Moreover, only input invoices that comply with the VAT Law are eligible for VAT deduction.

Which types of invoices qualify for VAT deduction

In essence, VAT targets the final consumer, so only goods/services that participate directly in the production of VAT-liable goods/services can be listed for VAT deduction. To deduct value-added tax, a business must meet the following requirements:

A lawful VAT invoice
A non-cash payment document of 20 million VND or more

Costs not eligible for VAT deduction

In principle, the cases where tax cannot be deducted are regulated as follows:

Input VAT on services/goods that do not participate directly in the production process
Goods/services that participate directly in the production process but are not subject to VAT
If a business purchases goods/services serving both VAT-liable and non-VAT-liable activities/services, it may only deduct the VAT for the VAT-liable activities that participate directly in production. The VAT of the other activities will not be included in the deduction list.
VAT invoices that violate the law or are missing information will also not be counted when deducting value-added tax.
Forged invoices, or invoices showing signs of erasure or alteration
VAT invoices that do not truthfully reflect the value of goods and services

How to deduct VAT

To perform online tax deduction, first the business logs into the HTKK software, then selects "Value-Added Tax" and finally "VAT deduction declaration (01/GTGT)". The business declares indicators 23, 24, and 25. Indicator 23 reflects the value of goods and services purchased. Indicator 24 reflects the value-added tax of the goods and services purchased. Indicator 25 reflects the total VAT deductible in the period.

How to deduct VAT on imported goods

VAT on imported goods is determined as follows:

The import price equals the import price at the border gate plus import duty (if any), plus special consumption tax (if any), plus environmental protection tax (if any)
For goods with import duty exemptions or reductions, the VAT-taxable price is the import price plus the import duty determined at the rate payable after exemption or reduction.

How to deduct VAT on fixed assets

Under the regulations, if a fixed asset falls into the following special cases, VAT cannot be deducted:

Fixed assets used exclusively for national defense and security; fixed assets of credit institutions, insurance, and securities businesses; medical examination and treatment facilities, training facilities; civil aircraft and yachts not used for business purposes.
Fixed assets that are passenger cars with 9 seats or fewer valued above 1.6 billion VND (excluding tax). In this case, the input VAT corresponding to the portion of value above 1.6 billion VND is not deductible.

Outside these special cases, fixed assets serving the production and trading of goods remain eligible for VAT deduction.

VAT deduction journal entries

The business must carry out the VAT deduction journal entries at the end of the period before submitting the dossier to the tax department. The VAT deduction entries consist of the following 4 steps:

Calculate the output VAT payable in the period
Calculate the input VAT that is deductible
Perform the tax transfer entries
Verify the tax transfer entries

Conclusion

VAT deduction is how a business determines the VAT payable by subtracting input VAT from output VAT. Deduction ensures tax is not collected twice. However, not all input VAT is deductible. Only activities with lawful vouchers and invoices that serve directly the production and trading of VAT-liable goods/services can be deducted. Businesses should note to carry out deductions in accordance with the regulations and complete the value-added tax deduction entries at the end of the period before submitting them to the tax department.