Value Added Tax (VAT) plays a key role in the structure of state budget revenue, contributing nearly 25 % of total domestic revenue. For CEOs of FDI enterprises, SMEs and medium and large corporations, understanding VAT not only helps to plan selling price strategies, optimize cash flow but also ensures that businesses comply with tax laws. This article will delve into the concept of VAT, the nature of indirect taxes, VAT calculation methods and VAT rates, and analyze current VAT refund and incentive policies so that readers have an academic perspective, full practical evidence and proposed improvement initiatives.
Concept of VAT
According to Law on VAT No. 13/2008/QH12 (amended by Law No. 31/2013/QH13 and supplemented by Law No. 48/2024/QH15), value added tax is an indirect tax levied on the added value of goods and services arising at each stage of production - circulation - consumption. The added value is determined by the difference between the output value and the input value that has been legally subject to VAT. In contrast to special consumption tax or import-export tax, VAT aims to be levied equally on all transactions, thereby encouraging transparency in the supply chain and avoiding "double taxation" on the same item.
In economics, Value Added Tax (VAT) is considered the optimal indirect tax collection mechanism because it allows each stage in the supply chain to declare only the value they create. This not only ensures fairness but also reduces fraud compared to traditional sales tax, where the entire revenue is taxed once. Thus, the concept of value added tax contains the nature of indirect tax, and at the same time lays the foundation for all detailed regulations on VAT calculation methods and VAT refunds later.
The nature of indirect taxes and value added
What is indirect tax?
Indirect tax is a form of tax in which the obligation to declare and pay tax is assigned to the business, but in the end this tax is passed on to the selling price and is actually borne by the consumer. In addition to VAT, some common examples of indirect taxes include special consumption tax, environmental protection tax, and import and export tax. The highlight of indirect tax is the flexibility in regulating prices through changing tax rates, while at the same time having less direct impact on business income than corporate income tax.
The nature of VAT
VAT is an indirect tax, meaning that businesses are responsible for declaring and paying the tax, but the final amount is paid by consumers through the selling price. In the supply chain, each stage of production and business must pay VAT on the value added, but at the same time, VAT paid at the previous stage is deducted. Thanks to this deduction mechanism, the accumulated tax does not accumulate at the final stage, thereby reducing financial pressure on businesses and promoting transparent business operations.
Value Added
Value added is the key point in the principle of calculating VAT. Specifically, the output value minus the taxable input value will give the base amount for calculating tax. When businesses take advantage of electronic VAT invoices and valid payment documents, they are allowed to deduct the entire input tax, helping to reduce actual costs. This is the reason why the method of calculating VAT according to the deduction mechanism has become a mandatory standard for most businesses.
Taxable entities and scope of application
Law on VAT No. 13/2008/QH12 (amended and supplemented by Law No. 31/2013/QH13 and Law No. 48/2024/QH15) clearly stipulates in Article 3 that all domestically produced goods and services, imported goods and business activities, service exchange, and transfer of rights to use intangible assets in Vietnam are subject to VAT, except for cases recorded as not subject to tax or exempted from tax under Articles 5 and 6 of the Law.
The group not subject to VAT includes social and charitable services such as education, healthcare, social protection, medical examination and treatment, testing and disease prevention services; credit activities, social insurance; public services with the goal of environmental protection, fire prevention and fighting, rescue and salvage. Not imposing VAT on these areas is a policy to reduce the burden on direct beneficiaries and ensure minimum benefits for the community when using essential services.
The VAT-exempt goods are specifically regulated in Article 6, including but not limited to: humanitarian aid, non-refundable aid; imported raw materials and supplies to create fixed assets for investment projects enjoying investment incentives; epidemic prevention drugs; imported medical equipment and supplies to serve epidemic prevention and control work; goods imported by socio-economic and political organizations to perform assigned tasks. VAT exemption for these groups helps encourage charitable activities, ensure the supply of medical supplies and support the development of projects of social significance.
Starting from January 1, 2026, according to Law No. 48/2024/QH15, enterprises with an average revenue of less than VND 100 million/month (equivalent to VND 1.2 billion/year) are exempt from VAT declaration. This provision does not mean tax exemption, but exemption from declaration procedures; that is, enterprises are still subject to VAT when transactions arise but do not have to submit monthly/quarterly declarations. This reduces compliance costs, creating favorable conditions for SMEs to start up in the early stages, helping them focus on production and business activities and expand the market without being hindered by administrative procedures.
VAT calculation method
Credit–Invoice Method
The deduction method is designed to accurately record the added value at each stage of the production - circulation - consumption chain. Basically, businesses determine the VAT payable by taking the total output VAT (arising from revenue from selling goods or providing services) minus the total input VAT (paid to suppliers at the previous stage).
The process begins when the enterprise issues an electronic VAT invoice to the customer, clearly stating the total value of goods and services and the corresponding VAT. At the same time, the enterprise must collect and keep all valid documents of the input stage: legal VAT invoices issued by the supplier, customs tax receipts for imported goods, sales contracts showing the transaction value and payment documents (transfer, cash with confirmation). Closely checking these documents not only ensures that the enterprise is fully deducted, but also creates a transparent profile for the tax authority when checking and inspecting.
A specific example shows the transparency of the deduction method: suppose enterprise A buys raw materials at a price excluding VAT of 1 billion VND, input VAT of 100 million VND. Then A manufactures products and sells them to B at a price excluding VAT of 1.5 billion VND, output VAT of 150 million VND. When declaring, A will pay the actual VAT of 150 million minus 100 million, or 50 million VND. Thus, only the additional value of 500 million VND is taxed, corresponding to 50 million VND of actual VAT paid.
Although the deduction method requires a strict accounting and document storage system, it is still a mandatory choice for businesses with large revenues and complex supply chains, because of the fairness and transparency it brings to the entire market.
Direct Method
The direct method is mainly applied to entities that cannot deduct input tax due to lack or non-availability of valid documents, such as individual business households, traditional market traders, or small retail services that do not issue input invoices. Instead of calculating on the difference in value, this method applies a fixed percentage to the total revenue generated to determine the amount of VAT payable.
The applicable rate usually ranges from 1 % to 3 % depending on the industry and scope of activities, specifically regulated by the Ministry of Finance in the guiding Circular. For example, a food service business household can apply the rate of 1 %, while a domestic transportation business household can apply 2 %. This calculation is simple, saving time and effort for small establishments, because they do not have to store complicated input invoices.
However, the direct method carries the risk of tax loss: because it is based on declared revenue, if a business household deliberately understates its revenue or does not fully declare it, it will be difficult for the tax authority to control. Furthermore, this method does not accurately reflect the actual added value, which can lead to over- or under-taxation compared to the value that the business actually creates. Therefore, the tax authority often closely inspects and reviews entities applying the direct method to limit revenue loss.
VAT rates and preferential policies
The current VAT Law stipulates three basic tax rates: 0 %, 5 % and 10 %.
- Tax rate 0 % applies to exported goods, services, international transportation and exported unprocessed raw materials.
- Tax rate 5 % is for essential goods such as textbooks, fertilizers, clean water and public services.
- The tax rate of 10 % applies to most domestically consumed goods and services such as electronics, apparel, tourism and restaurants.
The tax rate policy of 0 % and VAT refund for exported goods helps FDI enterprises reduce output costs and improve competitiveness in the international market. Enterprises wishing to enjoy the tax rate of 0 % must have a foreign trade contract, foreign currency payment documents, and import-export customs declarations; while the goods subject to 5 % are specifically regulated in Article 9 of the Law on VAT.
VAT declaration, refund and inspection mechanism
For businesses with large revenues, VAT declaration must be made monthly via form 01/GTGT; while small and medium enterprises (SMEs) can declare quarterly. VAT e-invoices will be deployed nationwide from 2022, helping to shorten processing time and minimize data entry errors.
VAT refund procedures for exporters or businesses with a large input ratio, with an average processing time of 12-14 working days. In 2023, more than 45,000 tax refund applications were received with a total value of over VND 120,000 billion, demonstrating the effectiveness of the VAT refund policy.
The Tax Department continuously inspects and examines businesses with unusually high input deductions. In the first half of 2024, the total amount of tax arrears and penalties for violations related to VAT deductions amounted to more than VND8,500 billion, mainly due to errors in documents and the use of illegal invoices.
Socio-economic impact of VAT
Contribution to the state budget: Sustainable and stable source of revenue
VAT is currently the largest source of revenue among indirect taxes, accounting for about 23.1% of total domestic revenue, surpassing both corporate income tax and special consumption tax.
- In 2023, VAT revenue will reach about 400,000 billion VND.
- In the first 6 months of 2024, total revenue reached 450,000 billion VND, an increase of 16.11% over the same period, despite fluctuations in production and business activities.
This shows that VAT is not only a stable source of revenue, but also has the potential to expand according to the scale of the economy and domestic consumption growth. With a collection mechanism at each stage in the supply chain, VAT distributes tax obligations relatively evenly, avoiding sudden pressure on a segment of businesses or consumers.
Source: General Department of Taxation, 2023 Budget Revenue Report
Impact on consumption and inflation control
As a tax levied on final consumers, VAT has a direct impact on the consumer price index (CPI). Specifically:
- When VAT rates increase, prices of goods and services also increase, pushing up CPI.
- Conversely, reducing tax rates or expanding the list of goods subject to preferential tax rates (5 % or 0 %) can help cool down inflation, especially in the context of escalating raw material prices and input costs.
The government often regulates VAT as a flexible fiscal policy tool, supporting CPI control - an important indicator in macroeconomic stability.
For example, during the period of high global inflation due to the impact of oil prices and global supply chains (2022–2023), the Vietnamese Government reduced VAT from 10 % to 8 % for some groups of essential goods and services. This measure has contributed to stabilizing consumer prices, supporting purchasing power and stimulating growth.
Social justice and tax-free policy
Although it is an indirect tax, with a tendency to equalize the proportion between the rich and the poor, VAT in Vietnam still aims for fairness through:
- Tax exemption or non-taxation for community service areas: healthcare, education, insurance, environment, social security...
- Tax rate 0 % for exported goods → encourages businesses to expand global markets.
- Preferential tax rate of 5 % for essential goods: food, clean water, medicine, textbooks, processed agricultural products...
In addition, from January 1, 2026, according to Law No. 48/2024/QH15, enterprises with revenue of less than VND 100 million/month (VND 1.2 billion/year) will be exempted from declaring and paying VAT, creating favorable conditions to support small and micro businesses and startups in the early stages of development.
Promoting transparency and digital transformation
VAT also plays a role in stimulating businesses to make their accounting books transparent, thanks to the deduction and refund mechanism based on valid input invoices. This contributes to:
- Restricting illegal business and tax evasion
- Encourage the use of electronic invoices and cashless payments
- Creating a big data platform to serve digital transformation in tax management
In short, VAT is not only a pillar of the state budget but also a flexible economic policy tool, helping the Government regulate consumption, support businesses, ensure social equity and promote more modern national governance. This is the reason why VAT is increasingly focused on in public finance reform and international integration strategies.
International comparison and lessons learned
Regional VAT rates
In the ASEAN region, countries apply VAT (or equivalent GST – Goods and Services Tax) at different tax rates depending on budget targets, inflation control and social policies:
| Nation | Current VAT/GST Rate | Note |
| Indonesia | 11 % (expected to increase to 12 % in 2025) | Apply the same deduction mechanism as Vietnam |
| Thailand | 7 % (maintaining low levels to support consumption) | Has advanced electronic invoice management system |
| Malaysia | 6 % (once abolished, now restored from 2024) | Applying one-stop mechanism for tax declaration and refund |
| Singapore | 9 % (up from 7 % in 2024) | Integrating blockchain and AI into the tax system |
| Vietnam | 10 % (some items 5 % and 0 %) | Average structure, room for adjustment |
Vietnam's VAT rate of 10 % is in the middle of the regional tax rate range, creating a balance between the target of budget revenue and stabilizing consumer prices. However, in the context of modernizing public administration, Vietnam still has much room for improvement in terms of procedures and technology to improve policy effectiveness.
Lessons from international experience
Applying technology to reduce tax fraud
- Thailand and Singapore are pioneers in applying blockchain to VAT invoice management systems. This technology helps ensure the integrity, traceability and authentication of electronic invoices, thereby significantly reducing tax fraud and false invoicing.
- Singapore also uses artificial intelligence (AI) to analyze unusual transaction behavior and provide early warning of tax risks.
Vietnam can study integrating these technologies into the existing e-Invoice and e-Tax systems, creating a foundation for a smart tax deduction and refund mechanism, while supporting more accurate and timely tax inspections.
Simplify administrative procedures
- Malaysia has implemented a “Single Window” model for all VAT registration, declaration and refund activities. As a result, the time to process tax refunds is reduced to less than 10 days, significantly reducing compliance costs and facilitating export enterprises.
- Indonesia drastically reforms the input invoice verification process with an automatic match-invoice tool between buyers and sellers, limiting disputes and invalid records.
Vietnam can adopt the one-stop model from Malaysia, standardize the tax refund processing process, and integrate the data system between tax, customs and banking agencies to shorten processing time and increase transparency.
Practical problems and recommendations
Although value-added tax (VAT) is a key tax in Vietnam's indirect tax system, its implementation in practice still reveals many shortcomings that cause difficulties for businesses, especially small and medium-sized enterprises (SMEs) as well as foreign-invested enterprises (FDI). One of the biggest problems is the overlap between the Law on Value Added Tax and sub-law guiding documents such as Circular 219/2013/TT-BTC and subsequent amendments and supplements. The lack of consistency between the law and the circular makes the application of tax rates, conditions for deduction and refund uneven among local tax authorities, leading to different understandings and handling depending on the location. In addition, although e-invoices have been mandatory nationwide since 2022, by early 2025, there are still a number of businesses, especially in remote areas or traditional handicraft sectors, that have not fully converted, leading to the continued use of paper invoices with the risk of lost documents, incorrect declarations and difficulty in verifying the origin of input VAT. For the SME sector, the problem lies not only in technology but also in limited capacity to comply with tax laws. Many newly established businesses do not fully understand the conditions for deduction, tax refund procedures or declaration obligations, leading to incorrect declarations, omissions of invoices or ineligibility for tax refunds, thereby leading to additional collection and penalties when subject to tax inspections.
To overcome these shortcomings, it is necessary to synchronously deploy many solutions from legal, technological to training. First of all, the State should move towards standardizing the national e-invoice format according to a unified model, integrating traceability codes to ensure compatibility between accounting software and tax management systems. At the same time, the Tax sector needs to promote the application of artificial intelligence (AI) in invoice control, allowing automatic comparison of input and output data, identifying unusual signs such as fake invoices, duplicate invoices or tax refund fraud. This is an important step to increase transparency and minimize fraud in the digital business environment. In terms of improving business capacity, it is necessary to organize in-depth practical training programs on electronic tax declaration, invoice management and tax refund filing specifically for SMEs, especially in the transition period to implement the revised Law on Value Added Tax which will take effect from July 1, 2025. Finally, a fundamental recommendation is that the Ministry of Finance should soon issue a new guiding Circular to completely replace Circular 219/2013/TT-BTC, to ensure consistency with Law No. 48/2024/QH15 and to be consistent with modern tax management practices. Completing the legal framework and supporting businesses to proactively adapt to new regulations will be an important premise for the VAT policy to be effective, both ensuring budget revenue and promoting a transparent and sustainable business environment.
Conclude
Value-added tax (VAT) is not only a major and stable source of revenue for the State budget but also an important tool in regulating the macro-economy, supporting businesses and ensuring social equity. With a key role in the budget revenue structure, VAT contributes to improving transparency in production and business activities through the input and output tax deduction mechanism, while promoting digital transformation in tax management. Flexible and preferential tax rate policies for FDI enterprises, SMEs and key industries help reduce costs, increase competitiveness in the international market as well as support the sustainable development of the domestic business community. Although there are still some challenges in management, implementation and compliance, lessons from international experience in applying modern technology and simplifying administrative procedures will be a guideline for Vietnam in improving VAT policies. Overall, VAT not only reflects the nature of indirect tax on added value, but is also a flexible and effective tool for the country's socio-economic development and international integration strategy.
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