Tax break under new method of calculation
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Shanghai Daily, August 15, 2011
Taxpayers in China can look forward to paying less income tax when the State Administration of Taxation starts to tax year-end bonuses under a new method from September 1.
The new method comes after SAT issued a new notice recently that it would use a new mathematical formula for a quick-calculation tax deduction, used in a progressive tax regime, to better reflect a taxpayer's tax burden in line with his income and avoid situations where those who earn more before tax actually gets to keep less after paying tax.
In China, the year-end bonus is a one-off annual bonus that can be divided by 12 to determine the tax rate and a quick-calculation tax deduction number accordingly. The new practice, effective from September 1, introduces a larger quick-calculation tax deduction that may lead to less tax payment for certain people.
For example, an individual's year-end bonus is 19,000 yuan (US$2,813), equivalent to a monthly salary of 1,583 yuan. Under the new method, the tax rate is 10 percent of 1,583 yuan, with a quick-calculation deduction of 1,260 yuan. The individual owes 640 yuan in tax on the bonus.
Under the current method, a quick-calculation deduction of 105 yuan is applied, and the individual owes 1,795 yuan in tax on the bonus.
So under the new tax method the individual saves 1,155 yuan.
The new method scraps the old practice whereby an individual who seemingly earns more before tax pays higher taxes and takes home less.
China now levies its tax progressively in nine brackets, with rates ranging from 5 percent to 45 percent. The quick-calculation deduction is used to determine the person's final tax burden.
There have been complaints the current quick-calculation deduction system is not fair.
Under the current system, a person who gets a year-end bonus of 24,000 yuan will take home 21,625 after paying tax. But a person with a year-end bonus of 25,000 yuan actually takes home 21,375 yuan after tax, or 250 yuan less.
From September 1, the individual income threshold will be raised from 2,000 yuan to 3,500 yuan and the tax brackets cut to seven, with rates ranging from 3 percent to 45 percent.
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