China to Further Reform Individual Income Tax

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Last updated at: (Beijing Time) Tuesday, December 18, 2001

China to Further Reform Individual Income Tax

The central government is considering co-sharing individual income tax with local governments from next year as part of tax reforms, because China's individual income tax has grown at a rapid pace over the past several years," said Xia Jiechang, an economist with the Chinese Academy of Social Sciences.

Fast Increase on Personal Income Tax

Figures from the State Administration of Taxation indicate that the amount of personal income tax collected in China soared from 7.27 billion yuan (US$876 million) in 1994 to 51.1 billion yuan (US$6.2 billion) last year.

During the first seven months of this year, individual income tax rose more than 50 per cent to 54.7 billion yuan (US$6.58 billion).

In Western countries, the individual income tax is the largest single tax source of central governments, which makes up 20 to 25 per cent of the total central tax income, Xia said.

Reform not to Make the Tax Major Source

"But in the short term, the Chinese central government will not make individual income tax a major central tax source, because the average income level of Chinese residents is relatively low," he said.

The central government is also required to consider the interests of local governments, he said.

"The central government will only share a minority of the increased part of the income tax next year, based on the taxes collected this year," Xia said.

Zhang Peisen, a senior researcher with the Taxation Research Institute, said the detailed reform scheme on individual income tax has been submitted to the National People's Congress and is yet to be approved.

He did not give further details, such as how much the threshold on individual income tax will be raised.

Threshold to Be Set at 1,500 Yuan

"The threshold should be about 1,500 yuan (US$180) a month," said Hu Shaowei, an economist with the State Information Center.

The present threshold of 800 yuan (US$96) a month was introduced in 1981, when the living standards of ordinary residents were very low, he said.

At that time, the income of residents was less than 100 yuan (US$12) per month and so remained untaxed.

Reform to Consider Family Burden

China's reforms and opening up over the past two decades have rapidly increased average incomes, Hu said: "Residents with monthly incomes of less than 600 yuan (US$72) are considered low, an income of at least 900 yuan (US$108.4) per month is needed to maintain a basic standard of living."

Individual income tax reform should also take into account a taxpayer's family burden, such as whether they have a child or elderly family members to support, because the tax is designed to keep a fair distribution of social wealth, said Hu.

According to investigations by the National Bureau of Statistics, the Gini Index, an international measure used to measure income distribution, stands at 0.458 in China. This is above the international warning line of 0.4, and indicates that Chinese society suffers from income distribution inequity.

Income Tax Reform a Hot Topic in China

Ever since Jin Renqing, director of the State Administration of Taxation, disclosed in early 2000 that the state is considering raising the income tax threshold by expanding the tax-free section, the issue has become an increasingly heated topic in society.

According to the Individual Income Taxation Law of China, promulgated in the early 1980s, the threshold for income tax was 400 yuan a month. In the taxation reform of 1994, a comparatively complete taxation system was established, with income tax threshold rising from 400 yuan to 800 yuan a month.

China's Current Individual Income Tax Rate

Greater than RMB5,000 up to RMB20,000 20%

Greater than RMb20,000 up to RMB40,000 25%

Greater than RMB40,000 up to RMB60,000 30%

Greater than RMB60,000 up to RMB80,000 35%

Greater than RMB80,000 up to RMB100,000 40%

Greater than RMB100,000 45%

Income Gap Still Widening, Fair Distribution Urged

Income Tax Rate in West China will be Reduced to 15% or Less

China's Tax Revenue Up 21 Percent in 1st 10 Months