Compare and distinguish: What is direct tax? What is indirect tax?

Learn: What is direct tax? What is indirect tax? Distinguish between direct and indirect taxes. What are the types of direct taxes and indirect taxes?

I. Legal basis

• Circular No. 152/2015/TT-BTC issued by the Ministry of Finance on October 2, 2015;
• Law on Natural Resources Tax No. 23/VBHN-VPQH was promulgated by the National Assembly on December 29, 2022;
• Special Consumption Law No. 08/VBHN-VPQH was promulgated by the National Assembly on January 25, 2022;
• Law on Value Added Tax No. 13/2008/QH12 was promulgated by the National Assembly on June 3, 2008;
• Resolution No. 579/2018/UBTVQH14 was issued by the National Assembly Standing Committee on September 26, 2018;
• Personal Income Tax Law 2007 No. 04/2007/QH12 was promulgated by the National Assembly on November 21, 2007;
• Law No. 32/2013/QH13 issued on June 19, 2013 and Law No. 71/2014/QH12 issued on November 26, 2014 were amended and supplemented by the National Assembly to a number of articles of the Law on Corporate Income Tax.

II. What is direct tax?

1. What is direct tax?

Direct tax is a tax that is imposed directly on the income or assets of the taxpayer.

2. Direct taxes

In Vietnam, the two most common types of direct taxes are personal income tax (PIT) and corporate income tax (CIT).

2.1. Personal income tax

Personal income tax is a tax applied to income that individuals receive from salaries, wages or other sources of income according to the provisions of the law on personal income tax.

According to the Personal Income Tax Law issued by the National Assembly on November 21, 2007, income subject to personal income tax includes the following types of income:

• Income from winnings;
• Income from capital investment/capital transfer;
• Income from business activities, property rental;
• Income from inheritance, gifts (securities, capital);
• Income from copyrights such as: technology transfer, franchising;
• Income from wages, salaries or other income similar to wages or salaries.

See more :

>> How to calculate personal income tax from salary and wages;

>> How to calculate personal income tax from capital contribution and share transfer.

2.2. Corporate income tax

Corporate income tax is a tax applied to taxable income that enterprises and economic organizations earn from business and production activities and other sources of income according to the provisions of the law on corporate income tax.

Pursuant to the Law on Corporate Income Tax amended in 2013 and supplemented in 2014, income subject to corporate income tax includes:

• Income arising from business activities, production of goods and services;
• Other income such as:
  • Revenue from interest, loans, foreign exchange;
  • Bad debt recovery proceeds;
  • Revenues from unidentified liabilities;
  • Revenue from capital transfer or transfer of capital contribution rights;
  • Revenue from transfer, lease, liquidation of assets (including valuable papers);
  • Revenue from property use rights, property ownership rights, including income from intellectual property rights as prescribed by law;
  • Revenue from real estate transfer, transfer of investment projects or rights to participate in investment projects, revenue from transfer of rights to explore, exploit and process minerals;
  • Omitted business income from previous years and other income.

 >> See more: How to calculate corporate income tax.

III. What is indirect tax?

1. What is indirect tax?

Indirect tax is a type of tax that is not directly applied to the income and assets of the taxpayer but is calculated indirectly through the prices of goods and services.

2. Classification of indirect taxes

In Vietnam, common indirect taxes include: value added tax (VAT), import and export tax, special consumption tax, environmental protection tax and resource tax.

2.1. Value added tax

• VAT is a tax calculated on the added value of goods and services arising during the production and transportation process;
• The subject of VAT is the final consumer, but the person responsible for paying tax includes: producers and traders of goods and services.

>> Reference: How to calculate value added tax.

2.2. Import and export tax

➧ Import tax is a tax imposed by a country on goods originating from foreign countries imported into that country during the import stage to protect the consumer market for domestically produced products and supplement revenues for the state budget.

➧ Export tax is a tax applied on the value of goods exported from the domestic market to foreign countries or to duty-free zones.

Import tax rates are specified in each group of goods in the Export Tax Schedule according to the List of taxable goods groups and export tax rate brackets for each group of taxable goods in Decree No. 26/2023/ND-CP.

>> See more: Formula and calculation of export tax.

2.3. Special consumption tax

Special consumption tax is an indirect tax applied to luxury goods and services to regulate production, import and consumption in society.

The main purpose is to increase state budget revenue and strengthen production and business management for taxable goods and services.

Goods subject to special consumption tax as prescribed in Clause 1, Article 2 of the 2018 Special Consumption Law include:

• Card group;
• Wine and beer group;
• Gasoline group;
• Air conditioner group with capacity under 90,000 BTU;
• Group of 2-wheeled and 3-wheeled motorbikes with a capacity greater than 125cm3;
• Group of aircraft and yachts used in civil form;
• Group of cars with less than 24 seats, designed with partitions between passengers and goods;
• Group of votive offerings, not including children’s toys, teaching aids for children;
• Cigarettes, cigars, and products made from tobacco used for smoking, chewing, and sucking.

>> See more: How to calculate special consumption tax – Latest.

2.4. Environmental protection tax

Environmental protection tax is a tax levied when consumers use products that affect the environment such as: gasoline, oil, coal, disinfectants, pesticides, herbicides and forest product preservatives…

2.5. Resource tax

Resource tax is a type of tax that organizations and enterprises operating in the field of resource exploitation must register for tax declaration and payment obligations according to the provisions of the law on resource tax. In particular, the types of resources that must pay resource tax when exploited include:

• Group of crude oil, natural gas, coal gas;
• Group of metallic or non-metallic minerals;
• Group of natural animals, plants and seafood.

IV. Distinguish between direct and indirect taxes

1. Taxable entities

2. Characteristics

Direct tax	Indirect tax
Is a tax calculated based on the income and assets of the taxpayer.	Is a factor that makes up the price of goods and services.

3. Advantages

Direct tax	Indirect tax
Established on the principle of “more income – more tax” to ensure fairness and equal distribution of tax obligations among individuals and businesses with different incomes.	– Applying a uniform tax rate to a type of product or service does not increase the complexity of the tax authority’s management system. – Contribute to creating a large, stable and regular source of revenue for the state budget, while supporting control of the economy’s inflation rate and stimulating economic growth.

4. Limitations

Direct tax	Indirect tax
Creates complexity in the management of tax authorities, because this is a type of tax with a high risk of tax evasion when taxpayers try to declare a minimum income to reduce the tax payable.	– Ensuring fairness in indirect taxes is very difficult because taxpayers, whether low-income or high-income, must pay indirect taxes at the same rate. – Indirect taxes are often included in the price of products, which indirectly regulates the price of goods on the market, affecting consumers.

V. Frequently asked questions about indirect and direct taxes

1. What is the meaning of direct tax?

Most people think that the main function of tax is to increase state budget revenue. However, direct tax also has the meaning of regulating social income.

Simply put, people with higher incomes will have to pay more taxes. This plays a huge role in reducing the gap between rich and poor in society, especially in developing countries with strong economic growth like Vietnam.

2. How to calculate resource tax?

According to Circular 152/2015/TT-BTC issued by the Ministry of Finance on October 2, 2015, the resource tax payable is determined according to the following formula:

Resource tax = Taxable resource output x Taxable price per resource unit x Tax rate.

3. How to calculate environmental protection tax (EPT)?

Environmental protection tax payable = Number of taxable goods units x Absolute tax rate prescribed per unit of goods.

In there:

• Quantity of taxable goods:
  • For domestically produced goods: The quantity of taxable goods is the quantity of goods produced for purchase, sale, exchange, internal consumption or gifting;
  • For imported products: The quantity of taxable goods is the quantity of imported goods.
  • The absolute environmental protection tax rate is prescribed according to the Environmental Protection Tax Schedule issued by the National Assembly Standing Committee under Resolution No. 579/2018/UBTVQH14.

For example:

In December 2023, enterprise X sold 2,000 tons of domestically produced brown coal. The absolute environmental protection tax rate for brown coal products is VND 15,000/ton.

➧ Like that:

Environmental protection tax that enterprise X must pay in December 2023:

= 2,000 (tons) x 15,000 (VND) = 30,000,000 (VND).