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Raise Tax Exemption Threshold, Lawmakers Urged

A proposal to raise personal income tax exemption threshold from 800 yuan (US$98.9) to 1,500 yuan (US$185.3) was announced during the 17th Session of the Standing Committee of the 10th National People's Congress (NPC) that sat from August 23 to 28. While the proposals have been welcomed, many still believe that more adjustment is needed. 

The long-awaited adjustment has been praised by Chinese taxpayers, but many of them feel that it is still not enough.

The NPC Standing Committee is organizing a first-ever public hearing on the issue, but only 15 to 20 representatives will be selected to voice their opinions and a further 15 to 20 representatives will sit in on the hearing.

Suggestions raised in the hearing will be vital to the final decision. If representatives reach a consensus on the proposed 1,500 yuan (US$185.3) tax exemption threshold, the draft amendment will be reviewed for the second time at the 18th Session of the Standing Committee in October and will most likely be passed, with possible implementation on January 1, 2006, analysts said.

Statistics from the State Administration of Taxation (SAT) show that revenue from personal income tax hit 173.71 billion yuan (US$21.47 billion) in 2004, about 6.75 percent of the country's total, and remained the fourth largest source of revenue after added-value tax, enterprise income tax and sales tax.

The growth of personal income tax revenue
(source: SAT)

Year Revenue
,00 million 
,00 million
1994 72.7 5070.8 1.43%
1995  131.5 5973.7 2.2%
1996  193.2 7050.6 2.74%
1997 259.9 8225.5 3.16%
1998 338.6 9093.0 3.72%
1999 414.3 10315.0 4.01%
2000 660.4 12665.8 5.21%
2001  996.0 15165.5 6.56%
2002 1211.1 16996.6 7.12%
2003 1417.3 20466.1 6.92%
2004  1737.1 25718.0 6.75%

About 65 percent of personal income tax revenue generated in 2004 came from salaried workers. SAT head Xie Xuren revealed this at a press conference in March. The current taxation system has therefore been criticized for increasing the divide between the country's rich and poor.

Current laws stipulate that employers are to deduct personal income tax payable directly from staff salaries and hand them to local taxation bureaus. But private businesspersons and freelancers are asked to report revenues and hand in personal income tax voluntarily.

Tax deduction rates (on monthly salary)
(Note: the exemption threshold is 800 yuan for Chinese and 4,000 yuan for foreigners)

Revenue excluding exemption threshold
Tax rate
Below 500 yuan 5%
500---2,000 yuan 10%
2,000---5,000 yuan 15%
5,000---20,000 yuan 20%
20,000---40,000 yuan 25%
40,000---60,000 yuan 30%
60,000---80,000 yuan 35%
80,000---100,000 yuan 40%
Above 100,000 yuan 45%

"Employees with monthly salaries above 800 yuan (US$98.9) were about 1 percent of the total employed population in 1993, but the proportion rose to 52 percent in 2002, while the consumer price index in 2003 grew 60 percent over the year," Finance Minister Jin Renqing said at the 17th Session.

Comparatively, the statistics from National Bureau of Statistics show that the average monthly expenditure of an urban worker in 2004 was 1,143 yuan (US$141.3), much higher than the current exemption threshold.

Although the nominal 800 yuan (US$98.9) exemption threshold hasn't changed since it was first set in the 1980s, local governments have the authority to decide what items are tax deductible according to actual conditions.

Tax exemption thresholds nationwide

City Province Exemption Threshold
Guangzhou   Guangdong  1,600 yuan
Shenzhen  Guangdong  1,700 yuan
Zhuhai Guangdong 1,400 yuan
Beijing Beijing  1,200 yuan
Shanghai  Shanghai  1,400 yuan
Hangzhou  Zhejiang  1,200 yuan
Nanjing  Jiangsu  1,200 yuan
Xiamen  Fujian  1,500 yuan
Fuzhou  Fujian  1,100 yuan

Per capita income in key provinces (municipalities) in 2004

Province Per capita income
Guangdong 13,628 yuan
Beijing 15,638 yuan
Shanghai 16,683 yuan
Zhejiang 14,546 yuan
Jiangsu  10,482 yuan
Fujian  11,175 yuan

"It's better to fix the personal income tax exemption for monthly salary at 2,000 yuan (US$247.2) and the threshold should be raised every five years in order to suit socio-economic changes," said Yang Qin, a sales manager of China Netcom Foshan Branch, Guangdong Province.

Yang Qin, probably the only one representative in the province selected to attend the upcoming public hearing, began to solicit public opinion through Nanfang Metropolitan Daily on September 19.

He also suggested that certain tax-free items should be retained, to be adjusted region to region.  For example, funds for housing, medicare, pension and unemployment insurance.

In Chengdu, southwest China's Sichuan Province, two representatives who will be attending the September 27 hearing, a lawyer and a doctor, also discussed the issue with local citizens through the news hotline of Chengdu Economic Daily on September 15.

Li Lin, a doctor with the Sichuan Provincial Center for Disease Control and Prevention, surveyed 90 citizens at random on the streets of Chengdu City, and found that the majority preferred the 2,000 yuan threshold.

Many members of the NPC Standing Committee, in fact, disagreed with the 1,500 yuan threshold at a group discussion of the 17th Session, a memorandum released on the NPC website reveals.

"It is said that raising the tax exemption threshold will cause a drop in revenue by over 20 billion yuan (US$2.47 billion). However, it only accounts for 1 percent of the country's total tax revenue. It is a rather small figure and can be made up through strict collection on high-income groups," Li Lianning, a member of the Standing Committee, explaining the feasibility of higher exemption threshold.

(China.org.cn by Tang Fuchun, September 26, 2005)

Income Tax Increases 6.64 Times in Past Decade
Taxation System Must Be More Accountable
2,000 Yuan Suggested As Income Tax Baseline
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Income Tax Should Reflect Changing Times
Province Wide
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