The State Administration of Taxation (SAT) issued a notice on Tuesday saying it would begin collecting land appreciation taxes starting next month and the tax rate would be between 30 and 60 percent. The change triggered hot discussion in the media, including the following excerpts:
Jiangnan Metropolis News: The new notice about collecting the land appreciation tax will not only make the land system open, transparent and well regulated. It will also end the era in which the real estate developers could make unreasonably high profits.
Since SAT released the notice, the value of the country's property developers has plunged on the stock markets in Shanghai and Shenzhen. The average decrease of all property developers' stocks was 9.78 percent on Wednesday.
The central government has launched several measures to control the real estate market since last year, showing its determination to break the bubbles in the property sector. This move is the latest attempt.
According to current rules and regulations, local tax authorities can decide the tax rates based on local situations. The rates in Nanjing, Jiangsu Province and Shanghai are both 1 percent. The low rate is an insignificant part of the property profits.
By setting out the exact framework for collecting the land appreciation tax, the SAT could change the tax into a strong tool against the under-the-table deals of property developers, including faking financial reports and hoarding land. Hence, the real estate sector may return to its normal level of profit.
Under the latest SAT notice, the tax authorities have more practicable guidelines for collecting the taxes and real estate developers are no longer able to avoid paying taxes under various covers.
The real estate sector has long been considered the most lucrative business in the country and the sector's tycoons find their names in the list of China's richest. But their wealth was accumulated under rudimentary policies and laws.
The latest tax move will cut away a big part of the real estate profits and will surely help improve the country's land system.
Nanfang Metropolis News: The latest SAT move on the land appreciation tax may greatly help in containing the real estate boom, but it is unlikely to realize other government policy goals for the sector.
The developers will see huge increases in their costs after tax collection is changed according to the latest notice, especially for those who had hoarded large areas of land for development. The developers will probably pass along the increased taxes in the housing prices as long as their property can be sold.
Local governments will see huge income increases with this tax. The tax will be calculated in local government budgets, enabling the central government to better track the revenues.
The new tax guidelines will make it harder for local officials to manipulate land policy in favor of certain developers. The developers will find it harder to profit from their hoarded land.
The decision makers probably also wanted to check land speculation, encourage the development of low-end property projects and force the less competent developers out of the market through the latest tax move.
However, it is unrealistic to expect two birds to be brought down with the one stone. The property developers will try to reduce their taxes by raising their costs or by building more luxury housing for greater profits from the limited land on their hands.
There is much more for the government to do to get more affordable housing for common people. This includes granting tax benefits to low-end housing projects and imposing stricter supervision on the purchasers of low-price houses.
(China Daily January 19, 2007)