China’s New Round of Tax Policy Reforms to Target VAT and Personal Income Tax

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Nov. 22 – China is planning to accelerate its taxation policy reform that focuses on economic development mode transformation and income gap reduction.

China’s Minister of Finance Xie Xuren published an article on November 18 describing where the reform the country’s taxation system is heading. The article expresses concerns over double tax collection, environmental pollution, technological knowledge and innovation, income gap enlargement and social security system progress.

Xie’s article reveals the government’s determination to make its taxation system work for a better development mode, one that is more efficient and environmentally-friendly. Following the steps to levy consumption value-added tax (VAT) instead of production VAT, China also considers expanding the coverage of VAT and reducing business tax items to simplify the taxation system and avoid double tax collection. This will also become an essential solution to the imbalance between commodity and service taxation policies, and encourage further enhancement of the service industry, according to Xie.

A summary report issued in May by the think tank Sinosight, a part of the China Research Center for Public Policy, shows that China’s taxes on goods and services contribute to 48.3 percent of its total tax income; this figure is 30 percent higher than the United States and 16 percent higher than the OECD average. The high tax burden on enterprises is caused by the complicated taxation system in the country with a combination of VAT, business taxes and consumption taxes, and is gradually growing into a concern for the further growth of both domestic and foreign enterprises.

The Chinese government also shows great interest in encouraging its advanced technology development by reducing the relative enterprise income taxes. The “Circular on Tax Policies for Technologically-advanced Service Enterprises” issued on November 5 emphasizes that outsourcing service companies certified as “technologically advanced” in 21 Chinese cities can obtain 15 percent exemption of their total income tax. In addition, the education cost that does not exceed 8 percent of the company’s total salary outcome can be removed from the calculation of its total income.

Meanwhile, Xie states that China will reinforce environmental protection by adjusting consumption tax rates, reforming resource taxes and initiating an environmental protection tax.

China’s increasing social income disparity is another driver for taxation reform. According to Sinosight’s report, China’s personal income tax only accounts for 4.7 percent of its entire tax revenue, which is reasonably low compared to 34.7 percent in the United States and 24.6 percent on average among OECD countries. Despite China’s relatively small per capita GDP, the low percentage is still pertinent to the lack of efficient administration on the country’s growing population with high income.

A circular issued by the State Administration of Taxation in May this year demonstrates that the government is already starting to eye individuals with high income and plans to strengthen the administration of income tax derived from the revenue of property transfers, interest, dividends, loyalties and large-scale sole proprietorship. What is more noticeable, though, is the circular specifically emphasizes that future measures initiated by the government will make the administration of foreigners’ income more effective by intensifying a network among the taxation administration, banks and immigration office. In addition to that, the government will also focus on improving its foreign individual profile management, so it has better access to salary information.

At the same time, the reform targets the real estate bubble to curb further polarization. After issuing a series of policies to restrict property purchases, Xie says China will maintain efforts to promote real estate tax reform, including introducing a property tax. Specialists believe the new tax will mark the beginning of a significant period when China takes fiscal instead of political avenues to fortify the supervision of its property market.

Yang Chengxiao, a researcher on real estate markets, says a property tax will fundamentally change the regional GDP growth structure, reduce the spectacular investment into the market and will finally bring about robust and vigorous development of the property industry.