According to officials from the Ministry of Finance and State Administration of Taxation, China's fiscal and tax system is set to undergo structural reforms.
Details of the structural reforms are as follows: the existing value-added tax (VAT) based on production will be changed to consumption based; ordinary consumer goods will no longer be subject to consumption tax while certain luxury items will come under the tax net, and the tax base will be expanded appropriately; the enterprise tax system will be unified including the criteria for taxpayer, pre-tax costs and deduction of expenses, and tax rates; the individual income tax system will be improved by adopting a consolidated and categorisation combined model, and the tax rates will be revised appropriately; urban construction taxes and fees will be reformed, and a standardised property tax may be imposed; and the local tax system will be improved. In addition, local authorities will be granted tax administration rights appropriately under the premise of unified tax administration, reforms of the taxes and fees in the rural areas will be deepened, the agricultural specialty tax will be removed, and agriculture related tax rates will be gradually reduced to achieve the unification of urban and rural tax systems.
VAT to Shift from Production to Consumption Based
The shifting of VAT from production based to consumption based is good news to enterprises. At present, if a production enterprise purchases a machine costing more than Rmb100,000, of which Rmb17,000 is VAT, the depreciation will be deducted from the enterprise income tax annually based on the existing production-based VAT system. As such, it may take as long as 10 years to complete the deductions, which means the circulating funds of the enterprise will be held up. Under the new consumption-based system, the Rmb17,000 VAT can be directly deducted from the tax payable for the current month. This will result in quicker return of capital for enterprises to plow back into production. Enterprises engaged in integrated production, supply and marketing activities can benefit most from the new system.
Consumption Tax on Ordinary Consumer Goods to be Removed
Removing ordinary consumer goods from the consumption tax list is in line with the social development of the country. Consumer goods such as shampoo, soap, lipsticks, perfume and nail varnish are not daily necessities in an underdeveloped economy. However, as the people's standard of living improves, many of these items become daily consumer goods. If consumption tax is lifted from these items, production cost will come down and prices will be lowered too. In the end, consumers will benefit from savings in living expenses. On the other hand, items that are discouraged by the state, such as cigarettes and liquor as well as luxury consumer goods which are not daily necessities, will come under the tax net and the tax rates will be increased. The objectives are to suppress excessive consumption, resolve the conflict of uneven distribution of wealth and keep tabs on the development of the industries concerned.
Prior to China's WTO accession, domestic and foreign-invested enterprises were subject to different tax systems. For instance, their income tax rates were different; foreign-invested enterprises were subject to higher vehicle and vessel tax rates than domestic enterprises; land use tax was levied on domestic enterprises but not on foreign-invested enterprises; and the description and rate of the tax on leased property were different. Now that China is a WTO member, mainland enterprises are striving to comply with international practice. A unified taxation system is therefore important for creating a level playing field for all kinds of enterprises.
Consolidated and Categorisation Combined Individual Income Tax System
Individual income tax is divided into 11 categories such as wage, salary, interest, share dividend and bonus etc. These categories are subject to different formulas of computation and deduction as well as different tax rates. Compared to foreign countries, the Chinese categorisation is much more detailed. The directions of reforms in this area will be: re-classification into fewer, broader categories, and more uniform tax rates and criteria for deductions. Earlier, there were already reports on the possible revision of tax rates. At the same time, the authorities concerned also suggested that interest tax be cancelled and the threshold for individual income tax be raised. If these changes materialise, the tax burden of salaried workers will be significantly reduced.
Introducing Unified Property Tax
In developed countries such as the US, real estate and land are taxed together at a uniform rate. In China, real estate tax and land tax are levied separately. For instance, a person bought an apartment at Rmb10,000 in the mainland in the 1980s and the property is now worth Rmb100,000, however, the real estate tax is still levied based on the original value of Rmb10,000, which is not a fair practice. With the introduction of a unified property tax, various factors such as land appreciation can be taken into account in the calculation, and the system will become more reasonable. It is worthwhile to note that at present, real estate tax and land tax are applied to production enterprises and leased property. If the proposed property tax is adopted, all property owners will be subject to the tax. Interested parties should watch out for details of the new policy.
As experts point out, China has been making gradual moves to converge with international practice since its accession to the WTO. Introducing structural changes to China's tax system is necessitated by the development of its socialist market economy. It is also an essential move for the improvement of the socialist market economy. In summary, the scope of this round of adjustments is closely related to the general public and production enterprises. By lowering the overall tax burden of the people, it will also indirectly reduce their cost of living. Overall, the country's tax system will become more reasonable, fair and in step with the development of the market economy.