The effects of China's latest move to curb rising property prices remains to be seen, experts said.
China reintroduced the collection of a land appreciation tax on Thursday as the country's property boom shows no signs of abating.
The move targets real estate developers as the central government tries to cool the market.
The State Administration of Taxation last month decided to reintroduce the value-added tax (VAT) on land.
The move caused panic among property developers and pulled many property shares down as soon as it was announced.
According to the January 16 government notice, the VAT, which has been suspended for more than a decade, took effect on Thursday.
Property developers will have to pay 30 to 60 percent of their net gains as VAT. The tax will depend on the net profit from the sale of a property.
If the value-added rate is below 50 percent the tax will be 30 percent.
If the value-added rate is between 50 and 100 percent, 40 percent will be levied.
If the value-added rate is between 100 and 200 percent, 50 percent will be levied.
If the value-added rate is more than 200 percent, 60 percent will be levied.
The VAT will be collected when a single project is completed or transferred, according to the notice.
Excessive profit margins are said to be one factor behind the country's soaring housing prices.
SAT issued a notice shortly after the announcement that the tax is aimed at readjusting the profits of property developers and would not burden buyers.
"Though housing prices are decided by the market's supply-demand and have no direct link with the cost of development, the value-added rates would eventually affect supply and demand, and buoy prices," said Dong Fan, director of the property research center of Beijing Normal University.
Most insiders have adopted a cautious attitude.
Li Wenjie, manager of Beijing Zhongyuan Real Estate Co, said the effect of the value-added rates depends on its enforcement by the tax authorities.
"Developers who invest in luxurious houses would be severely put under scrutiny. The scrutiny would be less on developers who build affordable houses," Li said.
China introduced the VAT in 1993, but it was often not collected due to subsequent recessions in the property market.
"Rosy economic returns and liquid capital from both home and abroad will keep on flowing into the property sector," said a report released on Wednesday by the Academy of Macro-economic Research under the National Development and Reform Commission.
The report estimates that investment in the property sector will increase by 20 percent this year compared with that of 2006.
This investment craze is further fueled by expectation of the RMB appreciating, the report said.
(China Daily February 3, 2007)