China To Centralise Income Tax Collection

by Mary Swire, Tax-News.com, Hong kong

06 March 2002

Chinese Premier Zhu Rongji announced yesterday that China would centralise collection of income tax, sharing a fixed proportion of it with local governments. Previously income tax has been collected locally, under a regime instituted in 1994, and the Ministry of Finance has then had to negotiate with each province for a share of the money. Since income tax is the main source of revenue for provinces, this has resulted in a mismatch of resources, with the government unable to transfer welath from rich parts of the country to poorer regions. The current system also offers far greater scope for local corruption and misuse of funds.

"All additional revenue received by the central government from increased income tax receipts will be used as general transfer payments to local governments, mainly to the central and western regions," Mr Zhu said. The central Government expects to share half the income tax revenue with local governments this year and 60 per cent next year.

Alfred Shum, executive partner for China at Ernst & Young, said: "This is an important tax reform for the mainland. The goal of tax policy is to redistribute wealth within a country - from people to people or from places to places."

Value-added tax, which represents 85% of all tax revenue, is already collected centrally, and shared out; but income tax is making up a rapidly-growing proportion of revenues, as individual wealth grows and increasing use of bank accounts makes the tax more collectible.

Individual income tax is on a scale rising to 45 per cent while enterprise income tax is 33 per cent for local companies and 15 per cent for foreign firms.

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