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Self-Reporting Makes Tax Evasion More Difficult

The draft amendment to the Personal Income Tax Law focuses on better collecting taxes from the rich, according to a China Youth Daily’s report on September 26. Liu Yin, director of the research office of the Finance Department of the Capital University of Economic and Business, said the amendment should help prevent tax evasion.


According to an official from Tax Policy Department under the Ministry of Finance, the draft amendment requires the wealthy to file personal income tax, regardless of whether their taxes have been withheld on commission by their employers. This means they have to fill up Personal Income Tax forms regularly. If one hasn’t reported personal income and at the same time is discovered to have evaded tax payment, he will be held responsible not only for tax evasion, but also for failure to self-report.


Although a two-way inspection system on personal income tax administration will be set up, it cannot ensure the rich pay tax according to the regulations because advanced measures on tax collection are still lacking, Liu Yin explained. Tax avoidance happens frequently by those with high incomes because of backwardness and loopholes in taxation administration.


The rich should contribute more tax payments. However, the tax withholding system places the burden of tax payment on wage earners only, while loosening scrutiny on those with higher income. This is why rate of tax evasion among the wealthy is higher than wage earners. For example, the daily expenses of a rich family, road maintenance and insurance costs of their cars and even their children’s tuition are accounted for as company expenses. When discovered by tax authorities, these tax evaders may claim that they had no idea why the tax agent failed to withhold their payable taxes as commissioned. In this situation, tax authorities can only punish the agent.


Liu also explained other measures that have been taken to prevent tax evasion. For example, specific regulations on tax payment were made concerning use of company funds for consumer spending by employees and their family members, long-term loans given to employees by companies, insurance purchased for employees, etc. The nation has also set up files on those with high incomes and enhanced the personal income tax administration. However, the phenomena of the poor paying tax while the rich evade tax exist because there is still a lack of advanced inspection measures and consciousness on tax payment.


Self-reporting, combined with a tax withholding system, will make tax evasion more difficult, said Liu.


(China.org.cn by Wu Nanlan, September 30, 2005)

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