The direct VAT calculation method (fixed tax) is currently a popular choice for small businesses and individuals in the context of economic integration and tax administrative reform. With this method, taxpayers do not need to declare detailed input costs but only need to determine the total taxable revenue, then apply a fixed tax rate prescribed by the tax authority. This approach not only helps shorten the declaration time, reduce the burden of accounting but also enhances transparency in income management and supports tax authorities in assessing actual revenue quickly and effectively.
Practical benefits from direct VAT calculation method
The direct tax calculation method (fixed tax) is especially suitable for small-scale businesses and individuals with simple activities such as retail, food services, repair, processing or civil construction. Applying a fixed tax rate as a percentage of revenue not only helps to save significant accounting costs but also minimizes the risk of errors in tax declaration and payment.
In addition, the streamlined tax calculation process helps businesses reduce the time spent on administrative procedures, thereby focusing resources on product development, service improvement and customer expansion. For tax authorities, this form also creates favorable conditions for supervision, inspection and examination, contributing to improving the efficiency of social income management in the individual economic sector.
Legal basis and fixed tax rate
The direct tax calculation method (lump sum tax) is applied based on two important legal documents:
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Circular 40/2021/TT-BTC issued by the Ministry of Finance, providing specific instructions on how to determine lump-sum tax for each industry group.
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Decree 126/2020/ND-CP detailing and guiding the implementation of a number of articles of the Law on Tax Administration, including methods for determining tax obligations for business individuals.
According to the provisions of the above documents, the VAT rate applied by the direct method is classified according to specific industries:
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2% on total revenue for accommodation, food and beverage, transportation services;
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1% with wholesale and retail activities of goods;
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0.5% for small-scale manufacturing, processing or civil construction.
Every year, the tax authority will announce the maximum revenue threshold for applying lump-sum tax. Currently, according to the 2025 update, the ceiling is 300 million VND/year for individual business households.
The outstanding advantage of this method is that business households can proactively determine the amount of VAT payable by multiplying the total revenue generated during the period by the corresponding tax rate, without having to declare detailed input costs, depreciation or labor costs as in the deduction method. This helps simplify procedures, save time and minimize errors in the declaration process.
Applicable subjects and necessary conditions
The direct VAT calculation method (fixed tax) is designed specifically for individual businesses and small-scale businesses with simple operations that do not require detailed accounting of input costs. However, to apply this method, taxpayers must meet a number of specific conditions according to the guidance of the Ministry of Finance and the General Department of Taxation.
Firstly, the average revenue in the year does not exceed 300 million VND - this is the maximum revenue threshold according to current regulations (Circular 40/2021/TT-BTC), which is used by tax authorities to classify subjects subject to lump-sum tax.
Second, the business must be in the list of industries eligible for lump-sum tax. Ineligible sectors often include: large-scale industrial production, complex franchise chain business, or service provision with large revenue and input costs, requiring depreciation of fixed assets.
Third, individuals or business households need to register, declare and pay lump-sum tax at the tax authority at the commune or ward level - where the official business location is located, and commit to continuously applying this method throughout the tax period (usually 1 year).
In case the revenue generated in the year exceeds the permitted threshold (VND 300 million), the business household must switch to the deduction method of calculating tax according to the Law on VAT and the Law on Personal Income Tax from the beginning of the next fiscal year. This requires business households to closely monitor actual revenue fluctuations to promptly make adjustments, avoid being subject to tax arrears, administrative penalties or being assessed as tax evaders.
Detailed tax implementation process
To implement the direct tax calculation method, business households need to follow a four-step process:
Step 1: Declare and register for lump-sum tax method
In the first month of business or in the first month of the first quarter of the accounting year, the business household must fill in all information in the registration form for lump-sum tax calculation method (Form 01/KH-MST). The declaration includes personal information, business line, business address, tax rate selection and tax period (quarterly or yearly). After receiving the application, the tax authority at the commune or ward level will issue a tax code and confirm the tax declaration form.
Step 2: Record revenue generated
Taxable revenue is defined as the total amount of money received from the sale of goods and services before deducting any expenses. Business households can use traditional notebooks, books or simple management software to record each collection. At the end of each month, business owners summarize actual revenue, compare with receipts, invoices or bills (if any) to ensure accuracy.
Step 3: Calculate the tax payable
After determining the total revenue for the period, the taxpayer multiplies it by the fixed tax rate according to the registered business line. For example, if a coffee shop business has a first quarter revenue of VND 150 million and applies the tax rate of 2%, the tax payable is VND 3 million. For households with many different business lines, it is necessary to separate the revenue by each business group and calculate the corresponding tax portion.
Step 4: Pay taxes and report to tax authorities
Taxpayers must pay the calculated tax amount to the state budget in the correct period as registered (quarterly or annually). At the same time, they must prepare a lump-sum tax report (Form 03/TK-MST) with a list of revenue and tax paid, then send it to the tax authority. Complying with the deadline for tax payment and reporting helps avoid late payment penalties and fines.
Case study: Motorcycle repair business in Quang Nam
At the end of 2023, a motorbike repair service business in Quang Nam province (name withheld) chose to switch from the deduction method to the direct tax calculation method (lump-sum tax) after many years of difficulty in controlling input costs and tax declaration procedures.
Before the conversion, each month the household owner had to spend 5 to 7 days to compile and compare invoices for purchasing components, rental costs and other expenses. The manual accounting process was both time-consuming and prone to errors, leading to late tax payments and repeated reminders from the tax authorities.
After registering to apply the lump-sum tax, the situation improved significantly. It took less than a day to summarize revenue and determine tax obligations for the entire quarter. In the first year of application, this business household's revenue reached VND360 million - an increase of VND20% compared to the previous year thanks to focusing on improving service quality and shortening administrative management time. With a lump-sum tax rate of VND2%, the total VAT payable was VND7.2 million, about VND15% lower than the tax rate under the previous deduction method.
This case clearly shows the outstanding advantages of the direct VAT calculation method in minimizing procedural burden, optimizing compliance costs and creating conditions for small businesses to focus on developing core activities.
Assessment in auditing and tax management
In the context of applying the direct VAT calculation method, the role of auditors and tax authorities becomes particularly important in ensuring the transparency and reasonableness of declared revenue.
For auditors, the lump-sum tax method does not require detailed review of each input document as in the deduction method. Instead, they focus on assessing the authenticity of the total declared revenue through comparing revenue and expenditure books, cash receipts and bank statements. In addition, auditors need to check whether the registered business line accurately reflects the actual business and whether the applied tax rate is in accordance with legal regulations.
An important point in the audit process is to identify the risk of revenue fraud. This is done by comparing the declared revenue level with the industry average or similar scale of operations in the area, helping to improve the reliability of the business's financial statements and tax records.
From the tax authorities and taxpayers' perspective, keeping complete records, regularly monitoring actual revenue, and promptly updating changes in tax brackets or lump-sum revenue thresholds are key factors to ensure compliance.
In case the annual revenue exceeds the permitted level (currently 300 million VND), the business household must switch to the deduction method from the beginning of the next fiscal year. If this procedure is not followed correctly, the taxpayer may be subject to administrative sanctions or tax arrears according to the provisions of Decree 125/2020/ND-CP.
Advantages and disadvantages of lump sum tax method
The method of calculating VAT directly (fixed tax) is chosen by many business households and individuals due to its clear advantages in terms of procedures and costs. Applying a fixed tax rate on revenue helps business households save significantly on accounting costs, without having to set up a complex bookkeeping system or track input invoices. This is a particularly suitable option for small business models with simple operations such as sidewalk sales, food services, civil repairs, etc.
In addition to reducing administrative burdens, this method also allows businesses to focus their time and resources on product development and customer expansion, instead of struggling with tax procedures.
However, the biggest limitation of the lump-sum tax lies in the “rigidity” of the applied rate – which does not accurately reflect the actual cost structure of each household. For industries with high input costs, large asset depreciation or strong seasonal fluctuations, applying a fixed tax rate can cause businesses to pay higher taxes than they actually do, reducing the ability to reinvest.
In addition, when revenue suddenly exceeds the allowable threshold (currently 300 million VND/year), business households are forced to switch to the deduction method, causing disruption in management, requiring reinvestment in accounting systems, software and even accounting personnel. The sudden transition also affects cash flow and tax compliance in the short term.
Therefore, it is necessary to periodically evaluate revenue and expenses to consider the appropriate tax calculation method for each stage of development. In some cases, switching to the deduction method early will help optimize taxes better when the business begins to expand or invest systematically.
Practices and recommendations
To successfully apply the direct tax calculation method, businesses and individuals need to pay attention to three main factors. First, update and carefully study relevant legal documents to choose the appropriate tax rate and revenue threshold for the industry. Second, build a systematic revenue recording process, which can use management software or a simple spreadsheet for quick comparison. Third, coordinate closely with auditors or tax consulting services to regularly review, ensure accuracy and compliance with regulations.
In addition, during the transition period, businesses should prepare a detailed cost-benefit comparison report between the two tax calculation methods to make an informed decision. This not only helps save tax costs but also supports long-term development strategy planning.
Conclude
The direct tax calculation method (lump sum tax) is a flexible and effective option for households and small businesses – those who need a simple, transparent and cost-effective form of tax declaration. When applied correctly, this method not only helps reduce administrative burdens but also helps businesses optimize resources for core activities.
However, to maximize the benefits of the lump-sum tax method, taxpayers need to have a firm grasp of the legal basis, understand the implementation process and closely monitor revenue developments. In case of changes in regulations or revenue exceeding the permitted threshold, timely adjustment of the declaration method is an important factor in maintaining compliance and avoiding unnecessary legal risks.
If you are wondering about choosing between tax calculation methods, or need support in preparing documents and lump-sum tax declarations, please contact us - our team of tax experts is always ready to accompany and advise the most suitable solution for your business model.
