The public hearing on the raising of personal income tax exemption in Beijing on September 27 has fuelled discussions on personal income tax law and reflection on reforms of the whole tax system.
Tax reforms considered mainly include: gradually converting production value-added tax (VAT) to consumption VAT; gradually unifying enterprise income tax rates of foreign-funded companies and domestic companies, and improving the personal income tax system; adjusting policies on consumption tax and sales tax; quickening the pace of reform on local tax; implementing fee-to-tax reform and comprehensive tax reform in rural areas; and reforming the tax rebate system.
Tax reform, although initiated quite a long time before, is carried out gradually, which has aroused concern from scholars, economic observers and industry insiders. The State Administration of Taxation (SAT), a main tax policy maker, has given more emphasis to tax law enforcement, taxation within current laws, tax administration and collection, as released in a work schedule by SAT Commissioner Xie Xuren at a press conference on January 11.
Overall, tax reform was still thought to be a necessary step and solution for many fundamental problems. The following is an excerpt from an article written by Zhang Xuedan, a senior Ministry of Finance researcher, and published in the August issue of China Business Review.
Value-added tax (VAT): look around in one step
The conversion from production VAT to consumption VAT is a further adjustment on the basis of tax reform in 1994.
A pilot program of VAT conversion has been implemented in selected industries in the three northeastern provinces from July 1, 2004. Enterprises in equipment manufacturing, petrochemical, metallurgy industry, ship manufacturing, auto manufacturing, farm produce processing, military supplies and hi-tech products manufacturers can be free from VAT in their equipment investment.
However, only VAT in investment of newly bought equipment can be deducted and only eight industries are selected in the pilot program.
From July 1, 2004 to April this year, a total of 40,980 companies in northeast China were included into the pilot project. About 2.173 billion yuan was refunded for tax rebate or deduction.
Despite not being a full-scale reform, VAT conversion has already effectively reduced tax burdens and pulled up regional economic growth.
Experts have different opinions on how to spread it nationwide. An Tifu, a professor at Renmin University of China, suggests that machinery, equipments and apparatus should be first put into the tax exemption list, and then list real estates when time is ripe. The exemption can be reached immediately or in several steps in order to alleviate pressure on local fiscal revenues. The final decision will be made according to the effects in northeast China provinces in a longer term.
Enterprise income tax: moving to preferential system
Currently, nominal income tax for domestic enterprises is 33 percent, while that of foreign-funded enterprises is only 15 percent. The different tax rates for foreign-funded and domestic firms are the focus of enterprise income tax reform, as the Ministry of Finance and State Administration of Taxation are the main propellers.
Analysis of FDI inflow shows that it is mainly attracted to China's good economic environment, promising market, human resources, market system and judicial system, while tax preferences and policy support are usually the last factors to be considered.
Despite a unified tax rate being inevitable, the Ministry of Commerce holds a conservative stance in case of possible FDI withdrawal.
Analysts say that a compromise agreement might be reached, with certain transitional period guaranteed for foreign-funded enterprises.
The main points of enterprise income tax reform are forecasted in the article as follows:
1) Implement a unified legal person income tax system;
2) Salary for employees should be deducted before taxation;
3) Form a new pattern that industrial preferential policies serve as main part and local tax preference in supplement. It will give a boost to further optimized industrial structure, technological innovation and upgrade in the country;
4) Lower tax rate after consulting international practice and actual fiscal condition;
5) In order to ensure the smooth operation, certain transitional period will be set for foreign-funded companies;
6) Strive for synchronous reforms on value-added tax and income tax.
Professor An Tifu also reiterates the importance of unifying the deduction standard and standardizing tax base in order to avoid unfair taxation. In his opinions, the tax base should meet the requirements of modern enterprise system and technical innovation, and fully show its compensations for taxpayers' labor, capital, technology and risk. Suggested measures include: raise rate of depreciation; hike the ratio of advertising fees in the whole expenditures; certain amount of R&D expenditure should be exempted from tax; allow deduction of some risk-resistance reserve; eliminate quota on donations for public welfare.
Real estate taxes set to regulate market
Fast growing fixed-asset investment and strong speculative demand are driving forces for property overheating in some regions. The macro-control measures on real estate sector were initiated nationwide last year, but now seems nail-biting for the rebound. Thus, taxation was considered as an important tool to regulate the market.
Currently, only stamp tax and deed tax are levied in real estate transactions. Some local governments also made rules to levy personal income tax over transactions of certain types of houses this year. The property tax under deliberation will raise the costs for keeping real estate and can dampen speculative demands and further squeeze property bubble.
Media reports say that the Ministry of Construction has chosen six cities to conduct the pilot program, but they are not affirmed by the ministry yet.
The conceived contents of the whole real estate tax reform are said to contain the following points: the tax rate should be the same for both foreign and domestic companies; quickly set up real estate registration system and assessment system in order to facilitate taxation; land assignment fees should be exempted from the future property tax; real estate in rural areas are also subject to tax.
Accessory measures are needed with the collection of property tax. For example, there should be complete records on real estates, owners and transactions. Relevant assessment institutions, professionals, assessment rules and procedures are also required. Thus, the reform on real estate tax will be a long-term process.
Consumption tax items to change
China's luxury goods market, already the world's third largest, is expected to grow by 20 percent annually in the next three years, and sales volume will top US$11.5 billion by 2015 according to a report released by Ernst & Young on September 14.
However, consumption tax collection on luxury goods has not risen in tandem with their popularity.
Eleven categories of goods are subject to consumption tax including cigarettes, alcohol, cosmetics, skin-care and hair-care products, jewelry, firecrackers, gasoline, diesel, automobile tires, motorcycles and compact cars. The tax rates range between 3 percent and 45 percent. These goods are described as being high-grade or luxury goods, goods made of exhaustible resources, or goods that are not conducive to human health or social ecology.
As a tax imposed on selective goods, consumption tax functions to show fairness and efficiency as well. Thus, it should be adjusted continuously following the changes in social and economic development, government's consumer policy and industrial policy, citizen's living condition and consumption level.
The consumption taxes on 11 categories of goods, first levied in 1994, can no longer meet current situation and are doomed to be changed. The adjustment should include the following three aspects: first, the tax, which now is included in price, should be excluded so that the transparency of taxation can be strengthened; second, make structural adjustment in current tax items. New luxurious goods should be added into tax items, while the formerly thought luxurious goods, like ordinary cosmetics and skin nourishment products, should be deleted. Tax rates of goods can be adjusted according to actual condition; third, special consumption patterns should be subject to the tax, for example, entertainment in ballroom, nightclub and golf ground, etc.
High collection costs for legacy and bestowal taxes
The calls for legacy tax surges as the gap between the rich and poor is continuously enlarged. Such a tax might ease conflicts between the two sides and prevent huge amount of wealth from concentrating in hand of a few citizens. It can also alleviate shortage of fiscal revenue in some regions.
Before levying legacy tax, the taxation bureau should first probe into the wealth status of taxpayers. Thus, provisions on the real name of individual deposit account, personal credit information system, personal wealth registration system and a special assessment institution are needed. Without support of these systems, the tax collection will be costly. In fact, the move is rather a gesture than for revenue. In addition, to prevent taxpayers transfer or diversify assets, the legacy tax and bestowal tax should be made public simultaneously.
The article forecasted that legacy tax cannot be introduced in the short term as it is still debated widely.
(China.org.cn by Tang Fuchun, October 9, 2005)