Is Vietnam going too far with its tax revolution?

For decades, most small businesses in the one-party communist state of Vietnam have used a simplified lump-sum tax system, where taxes are calculated based on estimated revenue rather than formal accounting.In many cases, revenue assessments rely on informal consultations with local tax officials, as many businesses often do not maintain detailed sales records.According to Vietnam's Finance Ministry, around 2 million household businesses and entrepreneurs were using the lump-sum method at the beginning of 2025, while only around 6,000 had adopted the more complicated declaration system.The lump-sum system will be abolished entirely from 2026, meaning all registered businesses will be required to use the declaration system.The change is part of Resolution 68 — a grand scheme announced by Vietnam in May of this year to make the country's homegrown private companies the "most important driving force" of the economy by 2035. It aims to put them ahead of the foreign corporations and state-owned enterprises that have traditionally been privileged by Hanoi.Why is Vietnam overhauling its tax system?The resolution aims to deregulate markets for local firms, increase their protections, and improve access to capital.

It is also the first to explicitly enshrine property rights, fair competition and contract enforcement as legal principles.While Resolution 68 offers years of tax exemptions and lower administrative costs for businesses and workers, it is also aimed at substantially increasing tax revenue over the coming decades.Public spending is set to surge due to a combination of economic stimulus efforts and infrastructure development goals.

But with the Communist Party of Vietnam capping public debt, the government must find new sources of revenue.Data from the Organization for Economic Cooperation and Development (OECD) shows Vietnam's tax-to-GDP ratio has declined in recent years, standing at 16.8% in 2023 — below the Asia-Pacific average of 19.5% and far below the OECD average of 33%.Vietnam collected a record 1.6 quadrillion dong (around $66.7 billion, €57.10 billion) in taxes in 2024, mostly from domestic sources, according to the General Department of Taxation.In the first five months of 2025, the Vietnamese authorities collected around $560 million from small businesses, a 26% year-on-year increase.Vietnam wants to become Asia's next 'tiger economy'Hanoi hopes to amass capital for mega-infrastructure projects, such as high-speed rail and expressways, which it sees as key to future growth. This year alone, it plans to boost infrastructure spending by nearly 40% to $36 billion.It must also prepare for rising social security costs as Vietnam ages rapidly. The share of over-65s will jump from 8.4% in 2020 to 20% by 2050, according to UN forecasts — yet very few retirees currently receive a livable pension.Cracking down on corruptionThe Communist Party wants to modernize tax collection to curb corruption, especially in notoriously corrupt revenue offices.Since 2016, its anti-graft campaign has toppled two presidents, numerous cabinet ministers, and thousands of lower-ranking officials.According to Vietnamese officials and business analysts, many high-revenue companies continue to use the lump-sum tax method, which typically results in significantly lower monthly contributions than the declaration system.They believe Vietnam's homegrown private sector needs "fair competition" and equal treatment, and that means everyone paying their share."Both aims are laudable, but raising more revenue is tricky because tightening compliance risks political backlash," said Khac Giang Nguyen, a visiting fellow at the ISEAS–Yusof Ishak Institute in Singapore.But success will depend "less on writing new rules than on implementing them fairly, transparently and without the rent-seeking habits that have eroded public trust," he added.Small businesses bear the brunt of reformDissent is rare in Vietnam, where the Communist Party has further tightened its grip over the past decade. But videos of distressed store owners complaining about new tax demands have gone viral in recent weeks.Since every business has to switch to the declaration system by January 2026, many will face steep tax hikes, have to pay for expensive cash registers, learn bookkeeping and accountancy, and train staff to navigate the new rules.This comes as several sectors are still recovering from the COVID-19 pandemic. They also endured months of uncertainty over whether the United States would impose a 46% tariff on Vietnamese goods.

Last month, Hanoi negotiated the rate down to 20%.In addition to all this, "people in the markets are still shaken down by corrupt police," Zachary Abuza, professor at the National War College in Washington, told DW.While the government wants the private sector to drive growth, the new tax demands "appear to have the unintended consequence of putting many people out of business," he added.In July, updated laws on VAT, corporate taxes and personal income tax came into effect, requiring businesses to engage in more accounting and record-keeping.Additionally, last month, new and often complicated procedures for issuing invoices, paying VAT and sharing information with the authorities were introduced. The government has at the same time doubled the threshold for when people start paying income tax.Radio Free Asia reported in June that 80% of shops in the largest market in Vietnam's north-central Nghe An province have closed in recent months.The authorities have denied claims that tax changes are behind the closures. Hanoi officials admitted nearly 3,000 household businesses ceased operations in May and June, but said only 263 had revenues high enough to be required to adopt the new system from June.