Value Added Tax (VAT) is regulated by Article 4 of Circular 219/2014/TT-BTC and amended and supplemented by Article 8 of Circular 151/2014/TT-BTC (in 2015, additional items were added that are exempt from VAT).
The similarity between a 0% tax rate and no tax is that The entity is not required to pay any tax.
The difference between these two types of taxes is:
Not subject to tax | Tax rate 0% |
| – Businesses providing goods and services that are exempt from VAT are not required to pay VAT. | – Since they are still subject to taxation, businesses providing goods and services must declare and pay taxes in full and on time to the State budget every month. |
| – Businesses are not allowed to deduct or claim a refund of input value-added tax on goods and services used in the production and business of goods and services that are exempt from value-added tax according to regulations. Instead, this tax must be included in the original cost of fixed assets, the value of raw materials, or business expenses. | – Input VAT on goods and services used in the production and business of goods and services subject to tax can be deducted and refunded. |
DISADVANTAGES AND RISKS
- Profit margin is less than 10%.
The nature of VAT is an indirect tax, levied on the end consumer, not on businesses. Therefore, consuming tax-exempt goods benefits consumers but disadvantages businesses in the following ways:
- Output VAT:
Every business that collects payments from consumers on behalf of the state then remits the money to the state, so it doesn't affect the business's net revenue. Any business that sells goods must collect these payments.
- Input VAT that is deductible:
Businesses trading in goods and services subject to VAT (including those with a 0% VAT rate) are entitled to deduct input VAT on purchased goods and services. Therefore, input costs do not include the input VAT payable, as it will be deductible against output.
Furthermore, businesses trading in goods and services that are not subject to VAT are not allowed to deduct input VAT on purchased goods and services. Therefore, input costs are 10% higher (VAT rate is mostly 10%) => consequently, profits decrease by 10% => reduced competitiveness.
For example:
DN A (Businesses selling goods that are not subject to VAT) | DN B (Business dealing in goods subject to VAT) | ||
| Revenue from software sales | 500.000.000 | 500.000.000 | |
| VAT | Not subject to tax | (10%) 50.000.000 | |
| Goods purchased are deductible. | 400.000.000 | 400.000.000 | |
| Input VAT increased (10%) | 40.000.000 | 40.000.000 | |
| Value Added Tax payable | 10.000.000 | VAT collected from buyers, after deducting input VAT, must still be paid to the state budget >> this does not affect the company's profits. | |
| Profit (Non-deductible VAT is included in the expense) | 60.000.000 | 100.000.000 | Higher profits due to a 10% reduction in input costs. |
- Tax and accounting risks
- VAT declaration
Businesses that trade in goods and services not subject to VAT are required to separate input and output costs monthly; and reallocate them annually.
- Accounting
Accounting also requires separating the revenue, expenses, and profits of the non-taxable group from the taxable group. Therefore, the declaration and preparation of financial statements and settlement reports are much more complex.
The risk of being subject to back taxes or penalties during tax settlement is much higher if the taxable versus non-taxable categories are incorrectly applied.
SOLUTION
- Option 1: Recruit accounting staff with strong expertise in separating revenue and expenses into non-taxable and taxable categories, minimizing errors as even a small mistake will require a complete reallocation.
- Option 2: Utilize Expertis' tax settlement consulting services to gain a comprehensive understanding of tax settlement procedures, including: Tax settlement requirements; Risks associated with tax settlement; Preparation for tax settlement; and allowing businesses to focus on core business operations.
See more details TAX SETTLEMENT CONSULTING SERVICES click here
