Vietnam’s Ministry of Finance is reviewing the VND500 million (US$20,500) annual revenue threshold applied to household businesses for personal income tax and value-added tax, with a possible shift away from fixing a specific figure in law.

The move comes just months after Vietnam eliminated the long-standing presumptive tax regime in early 2026, replacing it with a system based on tax declarations and electronic invoices for businesses exceeding the revenue threshold. While intended to support small-scale operators and encourage their transition into formal enterprises, the reform is exposing new challenges in practice.

According to the Ministry of Finance, around 3.6 million household businesses are currently under tax management. Of these, 1,829,920 report annual revenues below VND500 million (US$20,500), leaving more than 1.77 million above the threshold.

However, this group is far from uniform. Only about 37,000 businesses generate over VND1 billion (US$41,000) per year, and just over 4,000 exceed VND10 billion (US$410,000). The vast majority remain small-scale operators with structures and capacities very different from formal enterprises.

For many of these businesses, compliance under the new system is not simply about paying more or less tax. It requires a complete shift in operations: maintaining accounting records, using software, issuing invoices, and integrating accounting into daily business activities.

Accounting alone has become a significant expense. For most household businesses, it is now a necessity rather than an option. Current estimates suggest costs ranging from VND2 million to VND5 million (US$80-205) per month, or VND24-60 million (US$980 - 2,460) annually.

Additional costs include electronic invoicing software, digital signatures, equipment, and maintenance fees, typically amounting to VND3-10 million (US$120-410) per year.

Yet the most substantial burden lies in time. With dozens or even hundreds of transactions daily, data entry, reconciliation, and error handling can take one to several hours each day. When translated into opportunity cost - lost income from time not spent on sales or customer acquisition - this can add another VND10–20 million (US$410-820) per year, or more for busier operations.

There are also initial setup costs: learning new systems, establishing workflows, correcting mistakes, and adjusting records. Even at modest labor rates, this effort can add several million to over VND10 million (US$410) annually.

Taken together, total compliance costs can range from VND40 million to VND90 million (US$1,640-3,690) per year. For many small businesses, this becomes the largest expense triggered by crossing the revenue threshold.

By contrast, under the previous presumptive tax regime, obligations were relatively modest. For trading businesses with annual revenues between VND500 million and under VND1 billion (US$20,500 - 41,000), tax payments typically ranged from VND7 million to VND15 million (US$290 - 615) per year.

Placed side by side, the comparison is striking. The cost of compliance under the new system can exceed tax liabilities several times over. For many, the price of “doing it right” has become the dominant cost of operation.

At a macro level, the implications are even more significant. With compliance costs estimated at VND40-90 million per business, the total burden for the 1.77 million businesses above the threshold could reach VND70.8 trillion to VND159.3 trillion (US$2.9 - 6.5 billion) annually.

This far exceeds the state’s tax revenue from the sector, which stood at VND25.953 trillion (US$1.06 billion) in 2024 and over VND31 trillion (US$1.27 billion) in 2025.

In other words, for every VND1 collected in tax, the economy may be spending VND2 to VND6 on compliance.

The challenge goes beyond financial costs. The structure of invoices poses another difficulty. Many small businesses rely on inputs sourced from traditional markets, farmers, or informal intermediaries - channels that often lack formal invoices.

This creates a mismatch. While output transactions must be documented, input costs frequently are not. As a result, legitimate expenses may not be recognized, potentially inflating taxable income.

In such cases, businesses may end up paying tax on profits they did not actually earn - not due to misconduct, but because the system cannot fully capture their cost structure.

This leads to a paradox: greater compliance can increase the risk of incorrect tax assessments.

Against this backdrop, a proposal by National Assembly deputy Nguyen Van Than has drawn attention. He suggests that businesses with revenues between VND500 million and VND5 billion (US$20,500-205,000) should be subject to a simplified tax mechanism rather than detailed transaction-based reporting.

The proposal resonates with millions of household businesses, for whom the issue is not merely administrative complexity, but the combined weight of compliance costs and financial risk.

Most household businesses seek stability and predictability. But when the cost of transparency becomes excessive - and even introduces new risks - policy may remain sound in principle yet struggle in practice.

The likely response is predictable: businesses may avoid expanding or deliberately remain below regulatory thresholds.

Over time, an economy where small enterprises hesitate to grow could face broader consequences. When the cost of compliance outweighs tax obligations themselves, the issue may no longer lie with the businesses - but with the system they are asked to navigate.

Tu Giang - Lan Anh