China plans tax cuts for lower income earners

08:31, April 21, 2011      

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China is set to raise the monthly personal income tax threshold to 3,000 yuan (US$459) and trim tax brackets to relieve the burden on low and middle income groups.

A tax adjustment proposal reviewed by the Standing Committee of the National People's Congress yesterday suggests raising the current 2,000 yuan allowance to 3,000 yuan. Some lawmakers had called for an increase to 5,000 yuan before tax applied.

Expats currently enjoy an extra allowance of 2,800 yuan but it is not known if that will change under the new system.

The tax proposal includes cuts in tax brackets to enable more people to enjoy lower tax rates.

"The new system shows a clear aim to cut tax levies on lower income groups while increasing the tax levy on more affluent people," Freeman Bu, an Ernst & Young partner, said yesterday. "The focus is on taxes as a means of creating a fairer society."

China currently levies personal income tax in nine brackets, from 5 percent to 45 percent.

Under the new proposal, the 15 and 40 percent brackets will go.

In future, people with a monthly taxable salary of 1,500 yuan, rather than the current 500 yuan, will stay in the 5 percent tax bracket.

At the other end of the scale, people with a taxable salary of more than 80,000 yuan, rather than the current 100,000 yuan, will be included in the 45 percent maximum rate.

Individuals whose salary is more than 19,000 yuan will pay more tax, while those who earn less will enjoy a tax cut.

For example, under the new system, those whose taxable income tops 50,000 yuan will pay an extra 600 yuan. Those with a taxable salary of 5,000 yuan will save 200 yuan.

The income tax threshold was raised from 800 yuan to 1,600 yuan in 2006, and to 2,000 yuan in 2008. The 800 yuan figure was set in 1980, when earning that amount a month was a dream for many.

Bu said the tax changes would help lower-income families by putting more money in their pockets at a time when rising prices were eroding disposable income.

Morris Gu, an office worker in Shanghai, said his extra money would go toward higher mortgage payments due to China's four interest rate increases since October.

"Although the threshold is not as high as 5,000 yuan, it's better than nothing," said Gu, who earns a monthly salary of 6,000 yuan.

"China is a vast country with uneven regional development and hence regional variations," Joyce Xu, a Deloitte partner, said. "As such, there is no 'one size fits all' solution.

"In big cities like Shanghai, the 3,000 yuan threshold may not be enough, given the increasing cost of living."

Finance Minster Xie Xuren said the new tax system would take some 120 billion yuan from fiscal revenue compared to 2010.

China's tax revenue picked up growth in 2010 on rapid economic growth, rising prices, recovery of exports and stricter tax collection.

In 2010, China collected 483.7 billion yuan in personal income tax, which accounted for about 6 percent of total tax revenue.

China defines taxable income as including bonuses, lottery winnings and other income besides salary.

Source: Shanghai Daily
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