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Threshold of Personal Income Tax to Remain

Despite increasing calls to raise the 800 yuan (US$97) personal income threshold for tax, the government will stand firm -- at least for the rest of 2003.

A spokesman for the State Administration of Taxation (SAT) said at the weekend there is no chance of the threshold changing this year. But he did say SAT had been researching the issue.

The government has legitimate reasons to be cautious about any reform concerning personal income tax, he said.

It is not only because it concerns the sensitive issue of social equity but also as personal tax, which totaled over 100 billion yuan (US$12 billion) last year, accounted for a significant 7 per cent of the country's total tax revenue.

In addition, personal tax administration is guided by the Personal Income Tax Law. Revision and amendments of the law need to be debated by the National People's Congress.

A report by the Fiscal Science Institute under the Ministry of Finance has promoted the latest round of discussion.

The newly released report said the country's personal tax system should respond to the widening income gap between private individuals and should be changed.

The threshold should be raised and the tax rate for high income earners should also increase, it said.

Experts say the problem of China's personal tax payment system lies not only in the 800 yuan starting point.

According to Hu Angang, an economist with Tsinghua University, the way people's incomes are calculated under the system is a bigger problem.

But conditions are still not ripe for the problem to be addressed.

China's personal tax system classifies private individuals' income by 11 categories.

Personal tax is based on the amount of each income payment, even if a person receives income across the different categories within the same month.

It presents loopholes for those who have multiple sources of income. These people are often in the high-income group and should be a major target for tax collection.

Hu said a better approach would be to base personal tax on the sum of incomes a person earns within a specified period, such as a month.

However, a technicality then arises as China does not have a system that can record all of the incomes of a single person.

It means, the sound personal tax system should be based on a person's total income in a month or a year. However, to practice such a system in China is very difficult, since people have some channels to get money, but there is no an institute to record all their income from various channels.

For example, a person may get money from his or her company, meanwhile, he or she may also get income from part-time job, but the total money (salary plus part-time job income) he or she earns in a period of time cannot be known by the tax collectors.

 Zhu Qing, a professor with the Renmin University of China, said in calculating tax payers' financial assets, certain expenditure, such as children's education and pension funds, should be deducted.

 But this cannot be done at the moment due to technical reasons.

(China Daily August 4, 2003)

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