Should bank deposit interests be taxed?

Taxation on individuals’ bank deposit interest, which was proposed by lawyer Truong Thanh Duc from Ha Noi-based Basico Law Firm at the seminar "Suggestions on the draft law amending and supplementing some articles of five tax laws", has attracted huge attention from experts and the public. 

However, Duc proposed that tax will be imposed on only large deposits because they gain hundreds of millions and even billions of interests; therefore they are called investment and subject to tax.

According to current regulations, the starting taxable income subject to personal income tax (PIT) is VND108 million (equivalent to US$4,760) per year. If an individual earns annual deposit interest two times higher than the current taxable income (over VND200 million (roughly US$8,814)), this is a large amount and it should be taxable. With the current interest rate at 7 per cent per year, in order to earn an interest of 200 million per year, the account holder will deposit about 3 billion or more at the bank.

From the same view, Ph.D. Nguyen Tri Hieu, a banking and finance expert said that the taxation of deposit interests would create social justice and equality for all benefit sources from the individual's business activities.

"All income arising from business activities is taxed. Why the interest paid by the bank is exempt from tax while the VAT of the securities business is taxed and dividends per share are subject to PIT", Hieu raised a question.

This proposal is reasonable and in accordance with international practice. In advanced countries like the United States, all individuals have to pay tax on deposit interests. Bank deposits are also a profitable financial tool since income from deposit interests is the same as other income and should be taxable. Besides, the taxation of deposit interests also contributes to the State’s budget, Hieu added.

However, Hieu acknowledged that this proposal was approved, it would reduce the mobilized capital at the bank as the account holders would shift to invest in other sectors with higher interest rates. Therefore, it is necessary to consider increasing the limit of tax exemption or the tax exemption under special circumstances to reduce impacts on the people.

On the contrary, Economist Nguyen Minh Phong opposed this proposal, emphasizing that “Bank deposits include those deposited by enterprises and individuals including the poor, low-income people, pensioners… Moreover, individual’s deposits are also mobilized capital of the banks. If deposits interests are taxed, individuals may withdraw their deposits while the Government is loosening credit ceiling.”