Good Times Cost More as Levies Hit Luxury Goods

The mainland is preparing to introduce new consumption taxes on luxury services and goods in a major reform of the tax system, according to the Beijing Economic Daily.

Taxes of up to 20 per cent would be levied on bills at restaurants, nightclubs, karaoke bars, massage establishments and other entertainment businesses, the daily said. Among the products to be taxed with a levy of up to 45 per cent are cigarettes, wines, cosmetics and jewelry. However, the rate of taxation of products will vary.

Electronic games, for instance, will be taxed at 20 per cent.

The daily said that in taxing luxury goods and services, the Government would be following a practice common in other countries.

These taxes are to be included in a raft of revisions to the mainland's tax code - and will be the most extensive since 1992.

The Government is making the revision in order to broaden its revenue base.

Government revenue as a proportion of gross domestic product is unusually low. It declined from 28.45 per cent in 1978 to 12 per cent last year.

This is about half the level in other emerging market economies.

The new code will aim to establish a new unified and single enterprise tax which will, for the first time, put domestic and foreign-funded enterprises on an equal footing.

The tax holidays granted to joint ventures and firms in special economic zones will be phased out.

The draft legislation which was presented to the National People's Congress Standing Committee by Jin Renqing, director of the State Administration of Taxes, is one of the changes needed for the mainland's entry to the World Trade Organization (WTO).

With WTO membership comes the need to treat all enterprises equally.

Foreign invested enterprises will have to pay more taxes in the future, but it is not clear how long the transition period will be for these companies.

Exceptions will still be made for certain areas, such as companies investing in Western regions, but low tax incentives will be offered to all regardless of their origin.

The new tax regime is expected initially to slow foreign investment.

However, in the long term, domestic enterprises will benefit because they can compete on an equal footing.

Foreign companies offering services such as accounting, legal or auditing work are also to be taxed.

The new draft also provides for tougher penalties for tax evasion and heavier penalties for tax evaders.



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