How to calculate VAT is one of the most important contents in tax management in Vietnam. According to the General Department of Taxation, In the first quarter of 2024 alone, there were more than 850,000 VAT declarations. submitted electronically, showing the direct impact of this tax on production and business activities. In 2025, mastering the method of calculating VAT by deduction and direct methods will not only help businesses declare correctly according to regulations, but also optimize tax obligations, limit risks and ensure financial transparency.
See more articles at: VAT overview
Legal basis and applicable subjects
To understand how to calculate value added tax (VAT), businesses first need to grasp the legal basis and specific applicable subjects. This is an important foundation to ensure that tax declaration and payment comply with regulations, while limiting risks during tax inspection and examination.
Legal basis of VAT calculation methods
The method of calculating VAT is not a spontaneous convention of enterprises, but is strictly regulated in the legal system. Laws, decrees and guiding circulars create a unified legal corridor, helping to clearly identify taxable subjects, tax rates, calculation methods as well as implementation procedures. The regulation of VAT calculation is built on the following legal documents:
- Law on Value Added Tax 2008 (amendment, supplement) Law on Value Added Tax 2024).
- Decree 209/2013/ND-CP and related amending decrees.
- Decree 123/2020/ND-CP on electronic invoices and documents.
- Tax Administration Law 2019 and guidance circulars.
- The additional and adjusted documents are expected to take effect from 2025.
These documents create a legal framework for determining VAT, including taxable and non-taxable objects, tax rates, and VAT calculation methods.
Applicable objects of VAT calculation methods
The application of each VAT calculation method depends on the specific activities, scale and revenue of the enterprise. The tax authority has detailed regulations for classification, to ensure fairness, transparency and suitability for each type of business.
| TARGET GROUP | CONDITIONS/REVENUE | APPLICABLE VAT CALCULATION METHOD |
| Large enterprises | Revenue ≥ 1 billion VND/year | Mandatory deductions |
| Small/micro enterprises | Revenue < 1 billion VND, can register for deduction or direct | Deduction / Direct |
| Small business households and individuals | Low revenue, few invoices | Direct |
| Large business households and individuals | High revenue, with full documentation | Deductions may be claimed. |
| Administrative and career units | Have production and business activities | Usually deductible |
| Non-profit organizations, foreign capital projects | According to the specific activities | Mainly deductible |
How to calculate VAT by deduction method
What is the deduction method?
The VAT deduction method is the most common method of calculating tax in Vietnam, applied to businesses that meet the requirements in terms of scale, revenue and accounting regime. According to this method, the amount of VAT payable is determined based on output VAT minus deductible input VAT.
Explore the details of the VAT deduction method in the full article here: VAT deduction method
How to calculate VAT by deduction method
Enterprises only need to understand the calculation formula and deduction conditions to be able to determine the correct amount of tax payable, avoiding errors when declaring to the tax authorities. This is also a method to help enterprises manage costs effectively and fully meet legal requirements.
The formula for calculating VAT by the deduction method is as follows:
|
VAT payable = Output VAT – Input VAT |
In there:
- Output VAT = Taxable price of goods and services sold × VAT rate.
- Input VAT = Total VAT recorded on VAT invoices of purchased goods and services used for production and business activities subject to VAT.
Learn about VAT deduction and new regulations 2025 through this article: What is VAT deduction? Some latest related regulations 2025
Example of calculating VAT by deduction method
An Phat Trading Company Limited operates in the field of office equipment distribution. In July 2025, the company purchased goods from a supplier at a pre-tax price of VND 500 million, VAT rate 10%. Then, the company sold them to customers at a pre-tax price of VND 700 million, VAT rate also applied 10%.
| According to the deduction method, the amount of VAT payable is determined by output VAT minus deductible input VAT. In which, output tax is tax calculated on sales revenue, and input tax is tax paid when purchasing goods and services.
First, calculate output VAT: Then, calculate input VAT: |
Through this example, it can be seen that the deduction method helps businesses only have to pay the difference in tax between output and input. This brings advantages when businesses have large inputs, because VAT paid to suppliers will be deducted, avoiding double taxation and contributing to profit optimization.
See more articles at: Calculating value added tax by deduction method for enterprises
Advantages and disadvantages of calculating VAT by the deduction method
Calculating VAT by deduction method is a form applied by many businesses in Vietnam. However, like any other method, it has both advantages and disadvantages. Understanding the advantages and disadvantages will help businesses choose the appropriate tax calculation method and be proactive in managing tax obligations.
Advantages of calculating VAT by the deduction method
The most prominent advantage of calculating VAT using the deduction method is the ability to deduct input tax. This helps reduce the amount of tax payable, thereby optimizing business costs and increasing profits.
In addition, this method also creates transparency in transactions. When all expenses and revenues are shown through legal invoices, businesses can easily control financial activities. This is also the basis to help improve reputation when working with tax authorities and partners.
Another plus point is that the VAT calculation method by deduction contributes to encouraging businesses to use electronic invoices. This both minimizes fraud and is in line with modern tax management trends.
Disadvantages of calculating VAT by the deduction method
Besides the benefits, the deduction method also has many limitations. First of all, the enterprise must have full invoices and legal documents to be able to deduct input tax. If there are errors or missing invoices, the VAT payable will be higher than the actual amount.
Next, the method of calculating VAT by the deduction method is often more complicated in accounting and declaration. Enterprises need a team of specialized accountants to perform accurately, and must strictly comply with regulations on archiving and comparing documents.
In addition, the settlement and inspection process from the tax authorities is often more stringent. This makes it difficult for small businesses or individual business households to apply this method.
Summary table of advantages and disadvantages of calculating VAT by the deduction method
| CRITERIA | ADVANTAGES OF CALCULATE VAT BY DEDUCTION METHOD | DISADVANTAGES OF CALCULATE VAT BY DEDUCTION METHOD |
| Tax deduction | Help deduct input tax, reduce tax payment costs | No deduction is allowed if there is no valid invoice. |
| Financial transparency | Clear, transparent transactions, increased reputation | Requires strict bookkeeping, time consuming |
| Business Management | Support cost control, profit optimization | Need a team of highly specialized accountants |
| Policy & Management | Encourage the use of electronic invoices, in line with modern trends | The declaration and settlement process is complicated and susceptible to thorough inspection. |
How to calculate VAT by direct method
What is the direct method?
The direct method is a method of calculating VAT based directly on the revenue or added value of goods and services. Enterprises do not need to declare detailed input and output, but only determine the tax rate based on the % rate applied to revenue. This is a simple method, suitable for individual business households or small businesses that are not eligible to apply the deduction method.
See more articles at: Direct VAT calculation method
How to calculate VAT by direct method
The direct VAT calculation method is often applied to individual business households and small businesses that are not eligible for deduction. The calculation is quite simple, based on actual revenue multiplied by the VAT rate of % for each field. Businesses do not need to collect input invoices, only need to determine the exact revenue to apply the corresponding rate. This method helps reduce accounting procedures, suitable for small units but does not have the advantage of tax deduction like the deduction method.
The formula for calculating VAT by the direct method is as follows:
|
VAT payable = Revenue × VAT rate |
In there:
- Revenue: is the total amount of actual sales of goods and services (excluding expenses).
- Rate % VAT: regulated according to each field of activity:
| Business field | Rate of % VAT calculated on revenue |
| Selling goods | 1% |
| Services, construction without materials contract | 5% |
| Production, transportation, services associated with goods | 3% |
| Other business activities | 2% |
See more articles at: How to calculate VAT by direct method in 2023
Example of calculating VAT by direct method
Mr. Minh is the owner of a sole proprietorship, opening a grocery store in Cau Giay District, Hanoi. In July 2025, the store earned VND120 million in revenue from selling goods and VND15 million from delivery and packaging services. His business does not qualify for the deduction method, so the tax authority requires VAT to be calculated directly on revenue.
| According to Circular 69/2025/TT-BTC, the direct VAT rate is stipulated as 1% for goods distribution and supply activities and 5% for service activities. The store's revenue needs to be separated to calculate by each type.
For the goods part, the revenue is 120 million VND. The tax payable is calculated according to the formula: For the service part, the revenue is 15 million VND. The tax payable is calculated according to the formula: Summing both amounts, the VAT amount that Mr. Minh's store must pay in July 2025 is: |
Through this example, it can be seen that the direct method is simple in calculation but has the limitation that the business household cannot deduct input VAT. If the purchase is subject to high tax rate, that tax will become an expense, reducing business profits.
Advantages and disadvantages of calculating tax by direct method
The VAT deduction method is considered the most popular and transparent today, especially applicable to medium and large-sized enterprises. The calculation method based on the difference between output and input VAT helps to accurately reflect tax obligations. However, like any method, deduction also has its own strengths and weaknesses that businesses need to consider.
Advantages of calculating VAT by direct method
The first advantage is tax fairness. Enterprises only pay tax based on the actual value added, without being taxed multiple times. This helps production and business costs become more transparent and encourages enterprises to expand their operations.
Second, the deduction method allows businesses to deduct input VAT. Taxes paid when purchasing goods and services are deducted from the tax payable. This helps reduce the financial burden, especially during the investment phase.
In addition, this method also contributes to enhancing the reputation of the enterprise. When applying deductions, enterprises must fully use invoices and legal documents, which helps to make financial activities transparent and easily access capital from banks or partners.
Disadvantages of calculating VAT by the direct method
The biggest disadvantage is the complicated procedures. Businesses must manage a complete and accurate system of invoices and documents. If there are any missing or incorrect documents, input tax will not be deducted, causing financial losses.
Another difficulty is the need for qualified accounting staff. Calculations, reconciliations and declarations require high expertise, and mistakes can lead to late payments or fines. This puts pressure on small businesses that do not have a professional accounting department.
In addition, the deduction method also makes it easy for businesses to be inspected and audited regularly. Because the tax amount depends on the difference between input and output, tax authorities often require verification of documents, leading to wasting time and resources for businesses.
| CRITERIA | ADVANTAGES OF CALCULATING VAT BY DEDUCTION METHOD | DISADVANTAGES OF CALCULATING VAT BY DEDUCTION METHOD |
| How to calculate | Based on real, fair and transparent differences | Complicated, requiring complete documentation |
| Finance | Reduce the burden with input deductions | No deduction if documents are incorrect |
| Manage | Transparent, easy to create credibility with partners | Cost of highly specialized accounting staff |
| Risk | Limit husband tax | Vulnerable to tax inspection and audit |
Compare VAT calculation methods
Choosing the method of calculating VAT not only affects the amount of tax payable but also relates to the way the enterprise manages its finances and business operations. The two popular methods today are deduction and direct, each method has different characteristics, conditions of application and effectiveness.
VAT deduction method Usually suitable for medium and large-sized enterprises with a complete accounting system. The advantage of this method is that input VAT can be deducted, helping to reduce financial burden. However, the declaration, documents and settlement are complicated, requiring enterprises to have a team of highly specialized accountants.
Opposite, direct method It is simpler in calculation and declaration. Enterprises only need to base on revenue to determine VAT payable. This is the method commonly applied to business households, individual businesses or small businesses that are not eligible to apply the deduction method. The disadvantage of this calculation method is that input tax cannot be deducted, leading to the total tax payable being higher.
| CRITERIA | Deduction method | DIRECT METHOD |
| Applicable objects | Enterprises have complete accounting books and legal invoices and documents. | Sole proprietorships, individuals, and small businesses are not eligible for deductions. |
| How to calculate tax | VAT payable = Output tax – Input tax | VAT payable = Revenue × Rate % |
| Advantage | Input tax deduction, financial transparency, reduced tax costs | Simple calculation, easy to do |
| Disadvantages | Complicated procedures, requiring professional accounting | No input tax deduction, may increase tax payable |
| Fit | Medium and large enterprises | Small business households and individuals |
Policy changes affect VAT calculation in 2025
In 2025, the VAT policy will have some important adjustments. First of all, the consideration of continuing or ending the preferential tax rate 8% will directly impact businesses, especially industries that have been supported after the pandemic.
In addition, electronic invoices and online declarations will be managed more closely, and automatic data reconciliation will help limit false declarations, affecting both deduction and direct methods.
In addition, the direct method may be narrowed down to mainly small businesses. This encourages businesses to switch to the deduction method for more transparency in declaration.
In short, businesses need to proactively update new regulations and adjust VAT calculation methods to avoid legal risks.
10 mistakes to avoid in calculating VAT
To help businesses limit risks when fulfilling tax obligations, it is essential to identify common errors in VAT calculation. In fact, many errors not only come from incorrect application of formulas or confusion about tax rates, but also from subjective factors such as lack of updating new policies, loose document management, or accounting staff lacking enough experience. These errors can lead to serious consequences, from losing tax deduction rights, increasing costs, to the risk of being prosecuted and administratively sanctioned.
Below is a summary of the most common errors along with solutions to help businesses proactively prevent and comply with VAT regulations.
| STT | COMMON ERRORS | CONSEQUENCE | SOLUTION |
| 1 | Wrong application VAT rate (eg 8% to 10% or vice versa) | Enterprises pay too much or too little tax; risk of being subject to additional collection and administrative fines | Carefully check the list of goods and services subject to tax rates; directly refer to the latest laws and decrees |
| 2 | Missing or missing input invoices | Loss of tax deductions; increased business costs | Use electronic invoice management software for periodic reconciliation; establish a cross-check process between the purchasing and accounting departments. |
| 3 | Incorrect tax calculation method declaration (for example, small business households declare deduction instead of direct) | Errors in tax records; may be required to be adjusted or penalized by the tax authority | Determine the correct business size and model before registering for tax calculation method; consult a tax expert if necessary |
| 4 | Slow update of new tax policies | Risk of misapplication of regulations; increased risk of being prosecuted for violations | Regularly monitor new legal documents; register to receive information from the General Department of Taxation; organize periodic internal training |
| 5 | Inexperienced accounting staff | Errors in declaration and calculation are likely to occur. | Training and fostering of personnel on tax regulations; applying software to support automatic VAT calculation to reduce errors |
| 6 | Duplicate input invoice declaration | Increase virtual tax deductions, leading to violations and penalties | Set up an automatic reconciliation system; check invoice numbers before declaring |
| 7 | No separation of taxable and non-taxable income | Incorrect calculation of tax payable, affecting financial statements | Set up product/service categories by tax rate group in accounting software |
| 8 | Incorrect time of invoice declaration | Tax authorities request adjustments, easy to cause late payment | Check the invoice creation date and issue date; comply with the principle of timely declaration |
| 9 | Do not store related documents and contracts | Difficult to prove the legality of deductions during an audit | Store complete electronic invoices and contracts; secure data access authorization |
|
10 |
Skip periodic tax reconciliation | Failure to promptly detect errors leads to prolonged violations | Periodically compare data on the software with the General Department of Taxation system |
Conclude
VAT calculation plays an important role in corporate financial management, helping to ensure transparency, optimize costs and comply with legal regulations. Understanding the two tax calculation methods - deduction and direct - not only helps businesses determine the correct amount of tax payable but also limits risks when tax authorities conduct audits.
However, in reality, many businesses are easily faced with difficulties due to frequent changes in tax policies, leading to errors in tax declaration or payment. This can directly affect the reputation, profits and cash flow of the business if not handled promptly.
To avoid risks and improve tax management efficiency, businesses need the support of experts. MAN – Master Accountant Network provides comprehensive VAT solutions, from consulting, calculation to declaration management. Contact MAN now for professional support, ensuring legal compliance and sustainable development.
Contact information:
MAN – Master Accountant Network
- Address: No. 19A, Street 43, Tan Thuan Ward, Ho Chi Minh City
- Hotline: 0903 963 163 – 0903 428 622
- E-mail: man@man.net.vn
