China Weighs Up Large-Scale Reforms

August 26, 2010 Taxation in China

Chinese Embassy SealIndications have arisen that China could soon take steps towards introducing numerous changes to its taxation system, including reforms to Value Added Tax, Resource Taxes, Personal and Corporate Income Taxes, along with property taxes.

The Chinese Government is giving consideration to changes in almost every aspect of the national tax system, in order to improve the overall efficiency of the economy and revamp tax revenue streams. The intention was revealed in a statement by Xu Lin, director of the Department of Fiscal and Financial Affairs, on August 24th.

According to Xu Lin, the Department of Fiscal and Financial Affairs is investigating the feasibility of carrying out reforms which will make property taxes a stable and primary component of local Government bodies’ annual revenues. In addition, changes are being pursued to ensure that in the future, revenues from resource taxes will go directly to local Government bodies and not to federal authorities, reducing inefficiency, dependence and administrative time. If accepted, the changes will be of great benefit to the mineral rich Central and Western regions of China.

Under the current tax system, personal income tax liabilities are deducted directly from taxpayers’ salaries and wages, and the regulation does not take into account the number of dependents within the family, often leading to overly high tax payments. In order to add balance and fairness to the system, the Government is investigating changes which would automatically take into account the taxpayer’s situational considerations before any payment is made.

Currently, the service industry faces a sales tax, while the industrial sector is levied with a Value Added Tax (VAT). As the VAT enjoys various deductions at each stage of production, the service sector ultimately faces a proportionately higher tax burden. The Department of Fiscal and Financial Affairs hopes to remedy the imbalance, by investigating a conjoint reform to both systems, ensuring that they work in a fair balance.

In his statement, Xu Lin added that the Government could also introduce an environmental tax and reform the treatment of social security taxation.

Photo by @mjb