The Ministry of Finance says in a draft proposal that the corporate income tax (CIT) should be slashed to 15%-17% from the current 20% for small- and medium-sized enterprises (SMEs) to support business households wishing to convert themselves into companies.

Passers-by walk in front of shophouses. A tax reduction will give much-needed support to SMEs to grow their business and improve their competitiveness at home and abroad

The ministry recently released a draft proposal on the development of a National Assembly resolution on a number of CIT policies supporting SMEs.

The Government aims to raise the number of businesses to over one million by 2020, 1.5 million by 2025 and two million by 2030.

The ministry said that SMEs play a crucial role in Vietnam’s socio-economic development and act as a catalyst for economic growth. It noted that the country has more than 600,000 companies, nearly 500,000 of them in the private sector, with 96% being small or micro sized.

Private firms have so far created some 1.2 million jobs and have contributed more than 40% to the country’s gross domestic product.

According to the proposal, enterprises with annual revenue of less than VND3 billion (US$130,000) and no more than 10 full-time employees covered by social insurance should pay a 15% tax.

Meanwhile, those with annual revenue ranging from VND3 billion to VND50 billion (US$2.15 million) and fewer than 200 workers should be taxed 17%.

The ministry stressed that these CIT incentive rates would not apply to the subsidiaries of these enterprises to prevent tax evasion.

Tax incentive policies are a commonly used tool for promoting SMEs in many countries, according to the ministry. China, for example, levies a CIT rate of 25%, but small businesses just pay 20%.

The ministry also suggested CIT exemptions for two years after first reporting taxable income for those companies that transform from business households.

The ministry estimated that if the tax policy is applied, the State budget would fall by VND9.2 trillion (US$396.5 million) in annual tax revenue.

The reduction would put pressure on the State budget in the short term. However, the ministry said that the policy is expected to create favorable conditions for these businesses to make more investments and develop their business and manufacturing activities. As such, it will help increase CIT revenue over the long term.