The tax deduction method is a popular way to calculate value added tax (VAT), widely applied in the production and business activities of enterprises. Choosing and applying the correct tax deduction method not only helps to optimize costs but also ensures the legality and validity of tax declarations. This article provides a comprehensive view of the tax deduction method - from legal regulations to practical analysis, illustrative situations and legal risks if enterprises apply it incorrectly.
Legal basis of tax deduction method
The tax deduction method is stipulated in the Law on VAT No. 13/2008/QH12, amended and supplemented by Law No. 31/2013/QH13 and Law No. 106/2016/QH13. In addition, Circular 219/2013/TT-BTC and Circular 80/2021/TT-BTC are important guiding documents in implementing this method.
According to Article 12 of Circular 219, the tax deduction method applies to business organizations with revenue from selling goods and providing services, and meeting the requirements of accounting books, invoices and vouchers according to the current accounting regime. Enterprises are calculated VAT payable according to the formula:
| VAT payable = Output VAT – Deductible input VAT. |
This is a tax calculation mechanism based on actual added value, ensuring no double taxation on the same economic value, in accordance with international practices and Vietnam's tariff integration commitments.
Conditions for applying tax deduction method
Not all businesses have the option to opt for the tax deduction method. Prerequisites include:
- Enterprises must implement a full accounting regime, store valid invoices and documents, and use VAT invoices.
- Revenue of the previous year from 1 billion VND or more, if newly established, must voluntarily register according to this method.
- Notified the application of tax deduction method to the tax authority according to form 06/GTGT within the prescribed time limit.
In addition, some specific sectors such as trade, financial services - banking, or foreign-invested enterprises are required to follow the tax deduction method. In cases where the conditions are not met, the direct method must be applied on revenue, without input deductions - leading to significantly higher tax obligations.
How to determine output and input tax by tax deduction method
In the tax deduction method, output and input taxes are the two most important components to determine the amount of VAT payable.
Output VAT is the tax calculated on goods and services sold at the applicable tax rate. According to Article 8 of the Law on VAT, there are three common tax rates: 0%, 5% and 10%, depending on the nature of the goods or services.
Input VAT is the tax that a business has paid when purchasing goods and services for production and business subject to VAT. Only valid invoices (with seller's tax code, complete electronic invoice, non-cash payment if over 20 million VND) are eligible for deduction.
| Target | Amount (VND) |
| Taxable Revenue | 1.000.000.000 |
| Output VAT (10%) | 100.000.000 |
| Qualified input VAT | 60.000.000 |
| VAT payable | 40.000.000 |
By using the tax deduction method, businesses can plan their taxes and control costs more effectively than with the direct method.
Tax declaration and accounting process by deduction method
Enterprises applying the tax deduction method must make periodic tax declarations according to form 01/GTGT, along with a list of input and output invoices. Declarations are made monthly or quarterly depending on the scale of revenue from the previous year.
According to Circular 80/2021/TT-BTCThe deadline for submitting tax returns is the 20th of the following month if filing monthly, or the last day of the first month of the following quarter if filing quarterly.
In terms of accounting, input VAT is reflected in account 133, while output tax is recorded in account 3331. At the end of the period, accountants will reconcile and determine the amount of tax payable or deductible to be transferred to the next period.
Cases where input tax is not deductible
When implementing the tax deduction method, businesses need to pay special attention to non-deductible input taxes, including:
- The invoice does not have full content as prescribed.
Non-business expenses are subject to VAT. - Invoice for purchase of goods with value from 20 million VND or more but paid in cash.
- Input invoices of production and business activities are not subject to tax.
In case of intentionally declaring an input tax deduction that does not meet the conditions, it will be handled according to Article 16 of Decree 125/2020/ND-CP, the penalty can be up to 20% for the incorrectly declared tax amount and 0.03%/day for the underpaid tax amount.
Practical application of tax deduction method in enterprises
Statistics from the General Department of Taxation show that, by the end of the first quarter of 2025, more than 620,000 enterprises nationwide are applying the tax deduction method, accounting for more than 851,000 of the total number of enterprises declaring VAT.
In the manufacturing and trading sector, the deduction method is considered an effective tool in avoiding double taxation in the supply chain. For example:
Enterprise A specializes in manufacturing electronic equipment, purchases input materials with a total VAT of 90 million VND/month, sells finished products and earns 1.2 billion VND in revenue, with an output VAT of 120 million VND. At that time, the tax payable is 30 million VND. If the tax deduction method is not applied, the enterprise will have to pay up to 120 million VND, seriously affecting profits.
Legal risks and precautions
Some common mistakes when applying the tax deduction method:
- Buying and selling fake VAT invoices without actual goods.
- Wrong timing of input or output VAT accounting.
- Failure to fully retain documents within the 10-year period required by the Accounting Law.
To prevent this, businesses need to take the following measures:
- Cross-check invoice information on the General Department of Taxation system.
- Develop internal control procedures related to invoices and documents.
- Periodically review the reasonableness and validity of deductible input taxes.
- Train accounting department on legal updates related to tax deduction methods.
Conclude
Understanding and correctly applying the tax deduction method is not only an obligation but also an important right of enterprises in the current tax system. This method allows enterprises to accurately calculate the VAT payable based on actual added value, while avoiding the phenomenon of "tax on tax" which is a barrier in the supply chain.
However, along with the benefits comes the responsibility to strictly comply with the principles, conditions and legal regulations. Ignoring details such as the time of invoice recording, payment conditions, or document storage requirements can lead to great legal risks. Therefore, businesses should regularly update the law, invest in internal accounting and control systems, and proactively coordinate with tax authorities to properly implement tax deduction methods, creating a foundation for stable and sustainable development.
