China Looking To Reform Income Tax Regime

by Mary Swire, Tax-news.com, Hong Kong

20 June 2001

China's State Administration of Taxation issued a notice last week instructing tax bureaux throughout the country to keep a closer watch on the earnings of high income citizens such as sports and film stars, entertainers, and owners of private companies. The move is part of a wider drive towards reforming China's personal income tax regime, and has been welcomed by some, who believe that it will help shrink the gap between rich and poor which exists there.

Although the authorities have always taken tax collection from those in high income brackets seriously, efforts have sometimes been frustrated due to increasingly complicated income sources and tax evasion. Official statistics indicate that although the high income people in China only account for about 8.7% of the total population, they hold more than 60% of the country's bank deposits. However, they contribute less than 20% to the national income tax coffers, with the remaining 80% coming from the wages and salaries of ordinary citizens.

Experts such as Zhang Liqun, a senior research fellow at the Development Research Centre under the State Council, have stated that social stability and economic development in China will be affected if the widening income gap is not addressed, and have welcomed the news that the authorities are looking into creating a more unified income tax situation. 'Some high income earners evade payment of taxes,' he said 'while at the same time the gap between rich and poor is widening. China needs to improve its personal income tax system to help adjust income distribution in society.'

At present, China's individual income tax rates fall into 11 categories based on income source, but control over the person's total annual income is not considered. Zhang Peisen, a senior researcher with the Taxation Research Institute suggests that the system could be improved by unifying categories such as wages, salaries, individual business income, asset leasing and transfer. However, he also believes that the basic monthly income for taxation should be higher for all Chinese taxpayers. At present the level stands at 800 yuan (approximately US$96). However, this level was set in 1981, when the country's living standards were relatively low. China's reform and opening up have 'created miracles', he argues, and the level is now unrepresentatively low.

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