[HO CHI MINH CITY] It’s a familiar scene in a bustling alley of Ho Chi Minh City’s District 1: rows of motorcycles crowd the fronts of mom-and-pop shops, ranging from eateries and grocery stores to barbershops, coffee houses and street food stalls.
But behind the lively hum, anxiety is brewing among them – part of a sprawling 5.2 million household businesses nationwide – over a new tax rule that could significantly reshape the way they operate.
Nguyen Thanh Cuong, manager of a small French restaurant in the area, said he is working with a software provider to install a new cash register system that links to tax authorities and issues electronic invoices with authorised codes.
He is among some 37,000 establishments across the country scrambling to comply with a new regulation that took effect on Jun 1, requiring household businesses earning more than one billion dong (S$49,283) a year to report their sales using e-invoices.
Collectively, these non-farm household businesses, which outnumber registered businesses by five to one and employ about nine million people nationwide, generate up to 30 per cent of Vietnam’s gross domestic product.
However, according to the tax authority, these establishments contribute less than 2 per cent to total tax revenue – a figure mainly attributed to the previous presumptive tax regime, where shops paid fixed monthly taxes based on local officials’ revenue estimates, often far below their actual sales.
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The new rule aims to close that gap as part of the government’s broader push to formalise the informal economy, requiring all household businesses to eventually adopt proper bookkeeping practices for tax compliance, particularly through the use of e-invoices.
“With the system now linked to the tax authorities, few dare to underreport revenue. But some might use two separate systems to reduce their declared sales and pay less tax,” Cuong said. His eatery has been operating as a household business for more than a decade.
Despite the new rule, many household businesses have continued to exploit loopholes and resist adopting proper practices, from underpaying taxes and avoiding accurate bookkeeping. Some have even refused to accept payments via bank transfers, shut down entirely or continued operating off the books without registration.
“Taxes will probably be higher, leading to increased costs for input purchases, and eventually, we will have to raise our prices,” he added.
Formalising the informal sector
Another pathway for those family-run businesses to minimise such payments – and be taxed on profits rather than revenue – is by transitioning into formal enterprises, a move strongly encouraged by the country’s leadership.
“Forcing household businesses to register, follow accounting rules, connect with tax database and pay tax is a pillar of the formalisation push,” noted Le Truong Giang, analyst at London-headquartered consultancy Control Risks.
The initiative, combined with efforts to crack down on counterfeits and smuggled goods, is expected to expand the nation’s tax base, reinforce the formal economy by directing spending and investment towards registered businesses, and enhance consumer protection, Giang said.
“The promises are better public services and more public goods,” he added. “(However,) the potential downsides are significant. Impacts include huge disruption to business activity and household purchasing power as well as inflationary pressure.”
The brief period of intensified enforcement over this month appears to expose gaps in the ability of bureaucrats and the regulatory and digital infrastructure to realise promised efficiency enhancements.
“There’s an overwhelming amount of work. We are working at full speed but still barely keeping up with all customer inquiries,” said Bui Hai Nam, co-founder and chief executive at SoBanHang, which translates to “sales book” in Vietnamese.
The startup, backed by various foreign investors including Antler – a Singapore-based venture capital firm that focuses on early-stage investments – serves more than 650,000 small-scale sellers and household businesses in Vietnam. It offers basic sales management tools for those unable to afford traditional point-of-sale systems and has teamed up with authorised e-invoice providers to support merchants in meeting the new tax compliance requirements.
“I believe the new practices will encourage the most progressive household businesses to convert to formal enterprises, which already adopt similar accounting standards,” Nam said. “Such a shift is critical for them to grow and be able to serve larger customers.”
Quach Thi Thu Hien, deputy chief executive at a Hanoi-based distribution firm for international cosmetics brands, noted that household businesses rarely buy supplies from her company, which provides products with verified origins and value-added tax (VAT) invoices – normally at higher prices than in the informal market.
“But now it is changing. Many have started to adopt VAT-invoiced purchases and even register to become a formal enterprise. They are also actively looking for training and consulting about compliance and management,” she said. “This move towards greater tax transparency creates a level-playing field between companies like us and those household businesses.”
Finding growth engines
This new direction is underscored in a landmark policy document signed by Communist Party of Vietnam general-secretary To Lam in May, which aims to develop the country’s private sector, with a goal of increasing the number of formal firms from 940,000 to two million by 2030.
This is not the first time it has set such a goal. However, the earlier targets of hitting one million firms by 2020 and 1.5 million by 2025 have so far gone unmet.
Under the directive locally known as Resolution 68, the Politburo, Vietnam’s top policy decision-making body, decided on a series of reforms.
Vietnam will abolish business licence taxes and exempt corporate income taxes for small and medium-sized enterprises in the first three years of establishment, limit inspections and audits at firms to a maximum of once a year, alongside other incentives to facilitate their access to resources of land, capital and high-quality human resource training.
The presumptive tax regime for household businesses will also be removed entirely by 2026, with the promotion of digitalisation and transparency in accounting, tax reporting and insurance – regardless of their revenue levels.
In 2024, 64.6 per cent of the workforce, or about 33.2 million people, was still engaged in informal employment, based on Vietnam’s National Statistics Office.
They mainly include agricultural and rural workers, employees at household businesses, online merchants, as well as people working at underground enterprises.
While foreign-invested firms and domestic private enterprises led the way with high growth rates, small household businesses recorded some of the slowest growth in the non-state sector, with year-on-year increases of more or less 6 per cent before the Covid-19 pandemic.
“Culturally, they are super important to Vietnam, but it’s not a growth engine,” said Rich McClellan, principal at RMAC Advisory and vice-chair of the AmCham Environment, Social and Governance Committee.
“There were no incentives for the informal economy to formalise. If you don’t want to grow, all you are trying to do is earn enough to get by and stay under the radar,” he added.
Vietnam is now in a monumental phase – an “era of national rise”, as described by To Lam – with sweeping reforms underway across multiple sectors aimed at transforming the economy into a high-income status within the next two decades.
Much of the attention has gone towards big corporations, which are doubling down on big-ticket projects such as high-speed railways, mega energy plants, international financial centres, as well as new international airports and seaports.
The state has also significantly streamlined its bureaucracy, with about 250,000 jobs cut at local levels following the finalisation of the administrative mergers in the second half of this year.
The question is how to accelerate the growth of small family-run businesses at the other end of the spectrum and generate jobs and higher incomes for more people, including those purged from the state sector.
Starting with tax may be burdensome at first, but it could prove to be one of Vietnam’s boldest bets yet to grow its pool of formal enterprises and sustain double-digit economic growth through the rest of the decade.
“If you could get the state-owned enterprises to privatise, get the informal economy to become part of the formal economy, then… you’re actually getting close to that double-digit growth that the country wants,” McClellan said.
