What Is Tax Deduction? A List of Deductible Taxes and the Methods

Vũ Khôi

Author at Wotech Electronics Blog

Tax deduction exists to prevent tax from being collected twice. Deduction simplifies the process of collecting and managing taxes. Like other accounting operations, deduction must comply with regulations issued by the state. Only certain revenue or income sources qualify for tax deduction.

What is tax deduction?

Tax deduction is the method of deducting taxes such as value-added tax (VAT), personal income tax (PIT), or special consumption tax. Under this method, individuals or businesses do not pay tax directly — instead, the tax is deducted from their purchase costs or income.

Why must tax be deducted?

Tax deduction plays an extremely important role for the state. It facilitates tax collection because only one party — the business — pays the tax. In addition, deducting personal income tax helps the state control PIT evasion. Similarly, deducting VAT also helps the state limit tax revenue loss, because in this case the tax rate is clearly defined for each party.

Which types of tax can be deducted?

VAT deduction

VAT deduction is how a business determines the VAT payable to the state budget by subtracting input VAT from output VAT. Basically, when a business buys goods, it pays VAT on those goods — this is input VAT. However, when the business sells those goods, the customer pays VAT — this is output VAT. Since the nature of VAT is to tax the final consumer, the business must subtract input VAT from output VAT. VAT deduction applies to businesses that meet both of the following conditions:

• The business has revenue of at least 1 billion VND.

• The business fully declares its documents and accounting books as required by law.

PIT deduction

PIT deduction is when a business deducts tax from an individual's income before paying wages to the worker. Article 28 of Decree 65 specifies which personal income taxes are deducted as follows:

• Income of individuals not resident in Vietnam

• Wage and salary income from brokerage activities

• Income from insurance sales and multi-level marketing

• Income from capital investment

• Income from prizes/winnings

• Income from capital transfers by non-resident individuals

• Income from securities transfers

• Royalty income

• Income from franchising

Special consumption tax (SCT) deduction

Taxpayers who produce goods subject to special consumption tax may deduct the SCT already paid on imported materials or on materials purchased from domestic establishments. The deductible amount corresponds to the SCT of the materials used to produce the goods. Any SCT not fully deducted in the current period is carried over and deducted in the next period.

The SCT deducted for biofuel is calculated based on the SCT paid on the input materials in the immediately preceding tax declaration period. For example, in September, company A bought 5,000 liters of Ron 92 mineral gasoline with SCT paid at the beginning of the period of 5,000,000 VND. In November, company A sold 1,000 liters of E5 gasoline to company B, with a Ron 92 content ratio of 94.06%. Therefore, the SCT deductible in November is calculated as: 5,000,000 / 5,000 × 94.06% × 1,000 = 94,060 VND.

Tax deduction procedures

VAT deduction procedures

For VAT deduction, the process consists of the following two steps:

• Step 1: The business must prepare the complete document set and send it to the tax authority no later than the 20th of the following month (for monthly VAT declaration) or no later than the 30th of the following quarter (for quarterly VAT declaration).

• Step 2: The tax authority processes the VAT deduction dossier. If the business submits the dossier directly at the tax office or by post, tax officials record the date of receipt and the quantity in the tax office's registry. If the business submits the dossier via electronic transaction, the tax authority processes it electronically.

As for the documents, the business's tax accountant needs to prepare the following 4 types of paperwork:

• VAT declaration form 01/GTGT.

• Statement of VAT paid on revenue from construction, installation, and real estate transfers in other provinces, per form 01-5/GTGT.

• Statement allocating VAT to the locality where the company's head office is registered and to the localities where it has non-accounting production branches (if any), per form 01-6/GTGT.

• Statement allocating the VAT payable to the localities with inter-provincial construction and installation works, per form 01-7/GTGT.

PIT deduction procedures

For PIT, the business needs to prepare a dossier including:

• An application for the issuance of tax deduction certificates, per form 07/CTKT-TNCN.

• The business's business registration certificate.

• The business's letter of introduction/authorization.

• A photocopy of the ID card of the person named on the letter of introduction, accompanied by the original ID card for verification.

Once all the paperwork has been provided and the steps completed, the tax department will issue the business a PIT deduction certificate book containing two copies. Copy 1 is for reporting and archiving, while copy 2 is given to the individual whose tax was deducted.

Special consumption tax (SCT) deduction procedures

The business carries out SCT deduction procedures at the local tax authority where its head office is located. SCT not deducted in the current period is offset against the SCT of other goods. The business needs to prepare the special consumption tax declaration form 01/TTĐB and the statement of deductible special consumption tax (if any) on purchased materials and imported goods, per form 01-1/TTĐB.

Conclusion

Tax deduction applies to current taxes such as VAT, SCT, and PIT. It helps prevent the same goods from being taxed twice. The deduction process and procedures differ depending on the type of tax. Businesses therefore need to understand the process thoroughly to avoid errors when carrying out deductions.

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