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Taxation Policy Should Help Narrow Gap

Beijing resident Hua Yuejun earned a monthly income of about 1,000 yuan (US$120) 10 years ago.

At that time he was required to pay about 10 yuan (US$1.2) in monthly personal income tax, a reasonable amount he thought.

Ten years later, the monthly income earned by the 38-year-old clerk for a state-owned company has risen to about 3,000 yuan (US$361) due to the country's fast growing economy. But now he has to pay about 150 yuan (US$18.1) in personal income tax per month, a significant increase for him.

Moreover, prices for almost every product and service seem to have skyrocketed in the last decade.

Personal income taxes have therefore become the target of people's complaints. And many experts say the existing taxation system only serves to create a wider gap between rich and poor.

"No one is willing to see his or her salary being partly taken away as taxes when their salary is not high enough to serve their needs," said a certified public accountant based in Guangzhou, capital of South China's Guangdong Province.

The expanding gap between the rich and the poor during the past decade also encourages the poor to own as much money as possible, experts said. The State did not levy any tax on individuals two decades ago under China's planned economy.

It was only in 1980, as the country had embarked on economic reform, that the Law of Personal Income Taxes took effect.

Eventually, a systematic and regular taxation system was put into place in 1994. Years later, it became clearer that the 1994 taxation reform was not perfect, said Zhang Peisen, a senior researcher with the Taxation Research Institute under the State Administration of Taxation.

China's personal income tax rates vary in 11 categories based on income sources. For example, the highest income tax rate for individual salaries is 45 percent, and that for earnings by individual company owners is 35 percent.

Economist Hu Angang of Tsing-hua University says the personal income tax system fails to effectively collect taxes from the rich.

An earlier report said that China's rich people, who account for less than 20 percent of the country's total population, owned more than 80 percent of the country's bank deposits. But they contributed to less than 10 percent of the nation's total personal income taxes.

Among China's tax-paying groups, salaried people rank first and foreign expatriates second.

"Collecting taxes from salary earners is much easier as employers are required to debit the tax directly from salaries and make payments to the government," Hu said.

Private-business owners lag behind these two groups, he said.

In cities, people who earn lower incomes have a heavier tax burden than those who make more money, Hu said. "China's richest people have the smallest tax burden in the world."

The old personal income tax system also has many loopholes which tax evaders exploit, said Ni Hongri, a senior researcher with the Development Research Centre under the State Council, the nation's cabinet.

The most common such loophole is for business owners to show personal spending as company expenditure. Some even include their personal income in enterprise turnover to evade personal income taxes that are usually higher than corporate taxes.

According to tax laws, the extra amount of income is subject to taxation if the income is more than 800 yuan (US$96) a month.

In some companies with high salaries, it has become common practice for people to get their salary, sometimes several thousands of yuan a month, in installments, each less than 800 yuan (US$96), to avoid taxation.

"All residents with a monthly income of more than 800 yuan (US$96) are responsible for paying personal income taxes," Ni said.

In developed countries, people usually declare their monthly income or quarterly income to the tax bureau and pay income taxes on time.

"If they were found evading taxes, they would be fined heavily, and even face bankruptcy," Ni said.

China's personal income tax system is still in its infancy period compared with foreign countries, she said. "The country will have to gradually improve the system."

Xie Xuren, director of the State Administration of Taxation, said last month that the government will steadily push forward tax system reforms this year, though no timetable has been set.

Zhang Peisen said an improved personal income tax system should be based on a combination of various means of income, instead of salaries alone as is the current practice.

Personal circumstances, such as having dependents like children and the elderly, should also be considered.

Healthcare, insurance and education should also count as exemptions, he said.

In addition, the level at which income is taxed, currently at 800 yuan (US$96.4), should increase.

"The threshold should be 1,500 yuan (US$181) to 2,000 yuan (US$241) per month, as urban people's income has grown considerably during the past decade," he said.

Figures from the National Bureau of Statistics suggest that 53 percent of the country's State employees earned more than 800 yuan (US$96) per month today.

Monthly incomes of less than 5,000 yuan (US$602) should be subjected to lower tax rates, he said. "The interests of low- and medium-income earners should be protected under a new income tax policy."

Since January 1, the local governments in Guangzhou and Nanjing, capital of East China's Jiangsu Province, raised the personal income tax thresholds to 1,600 yuan (US$192.8) and 1,200 yuan (US$144.5) respectively.

For its part, the Beijing municipal government raised the personal income tax threshold to 1,200 yuan (US$144.5) last September.

According to Ni, a nationwide income information network needs to be set up and further reforms are also needed before China sees an effective income tax system.

Personal income tax received by the State has been growing annually at a rate of 48 percent since 1994, revealed figures from the State Administration of Taxation.

(China Daily February 23, 2004)

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