Tax reform aims to fuel consumption

0 Comment(s)Print E-mail Xinhua, March 14, 2011
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But for now, the focus is on taxes as a means of creating a fairer society.

"China is a vast country with uneven regional development and hence regional variations," Xu said. "As such, there is no 'one size fits all' solution. In big cities like Shanghai, the 3,000 yuan threshold may not be enough, given the increasing cost of living."

Dong Mingzhu, a National People's Congress deputy, said during the parliament's annual session that a minimum income threshold of 5,000 yuan is needed to ease the financial pressures on the generation born in the 1980s - China's first one-child generation. Dong, vice chairman and president of Gree Electric Appliances Inc, said her view is shared by other lawmakers.

There is indeed no shortage of ideas.

Guo Guangchang, another NPC deputy, called for a tax deduction on rents to help city dwellers who can't afford to buy homes and are faced with rising cost of leasing.

Everyone is kept guessing at this stage.

"I think a 3,000 yuan threshold is odds-on," said Bu. "A higher exemption may be too much for the government to digest, factoring in the need for economic development in vast, less developed areas of China."

The new threshold may not make everyone happy.

Deloitte's Xu said the increase in the amount a person has to earn before paying income tax should not be the only device in the toolbox that is used to reduce the tax burden.

"There are a number of other options that ought to be considered, including broadening the range of exemptions, tax relief and deductions, or a system to take into account an individual taxpayer's overall financial obligations," she said.

In the United States, for example, a person receives an exemption for every child and householders can deduct interest payments on their mortgages. In Australia, there are deductions for expenses like day care costs.

Of course, the smart money may use loopholes and exemptions to put themselves into lower tax brackets, so a sophisticated and mature tax infrastructure system is needed.

China's tax system is still at an evolutionary stage, which means it may take time before a mature system is established.

There is no reason to expect a more sophisticated system overnight.

With the wealth being accumulated at an unprecedented pace in China, the source of wealth becomes more diversified. The increase in the income tax threshold relates to employment income, but doesn't necessarily address other types of income, such as income from business interests, rentals and gains from the transfer of assets.

Tax reforms addressing these other avenues of wealth should follow in the future, market watchers said.

Changes to a tax system invariably have an impact on government revenue, which is why political leaders weigh those decisions carefully.

"An adjustment in the income tax would have a limited impact on China's fiscal income," said Xie Dongming, an OCBC Bank economist. "It's bearable for a growing economy like China."

Rapid economic growth, rising prices, a recovery in exports and stricter tax collections boosted China's tax revenue last year 23 percent to 7.3 trillion yuan from 2009.

Last year, revenue from personal income tax grew 22.5 percent to 483.7 billion yuan, accounting for about 5.8 percent of government income.

China's 2011 draft budget projects a 7.5 percent increase in individual income tax collections, presumably incorporating the effects of any proposed tax reform.

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