China to Adopt New Policy to Close Tax Loophole

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Last updated at: (Beijing Time) Thursday, July 17, 2003

China to Adopt New Policy to Close Tax Loophole

China has decided to adopt new measures of collecting personal income tax from individual company owners to counter loopholes in existing levying systems.

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China has decided to adopt new measures of collecting personal income tax from individual company owners to counter loopholes in existing levying systems.

The Ministry of Finance and the State Administration of Taxation jointly issued a notice yesterday clearly setting out, for the first time, how individual investors are required to pay personal income tax.

The new measures come into effect immediately.

Individuals, who use their company money to buy non-business-related items, such as cars and private homes, will be liable for personal income tax on such purchases, the notice said.

Individual investors, who borrow money from their companies to buy non-business-related items and do not repay those moneys within the tax year, will also have to pay at the personal rate, it said.

The move, which follows a series of campaigns in recent years to fight tax evasion, is considered an important step on the part of the government to improve the existing personal income tax system.

Ni Hongri, a senior researcher with the State Council's Development Research Centre, said the existing system has many loopholes.

"The most common is for business owners to show personal spending as company expenditure,'' Ni said.

Some even include their personal incomes in company turnover to avoid paying personal income tax.

But the latest move does not mean the government will soon reform the personal tax system, which has become a topic of heated debate among economists in recent years, said Ni.

Experts at the Ministry of Finance said the threshold for personal income tax, which stands at 800 yuan (US$96), should be raised.

They also argue that the government should try to lower the tax rate for those who earn less than 5,000 yuan (US$602) per month.

Zhang Peisen, a senior researcher with the Taxation Research Institute, said personal income tax is aimed at people with high-level incomes to promote economic development and social stability.

"Personal income tax should be based on a combination of various means of incomes, including bonuses and dividends, instead of merely salaries as is the case today,'' he said.

Zhang also contends that the personal circumstances of an individual, such as the support of children or elderly relatives, should be taken into consideration before the tax is computed.

According to Zhang, the existing tax system, including personal income tax, basically encourages, and is beneficial for the development of individually-run companies.

For example, the tax law stipulates that taxpayers in the lower income bracket, who sell self-made products abroad, are exempted from value-added tax.

The tax authorities have also raised the threshold of value-added tax and business tax for small tax payers.

The changes have benefited more than 1 million tax payers in the lower income bracket across the country, whose tax burden dropped by about 20 billion yuan (US$2.4 billion), Zhang said.

Laid-off workers who engaged in community service are also exempted from business tax and personal income tax.

From last year, the government exempted enterprise income tax for individually-run companies. Instead, it only levies personal income tax on company owners.

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