China To Reap US$40bn From Share Tax Hike

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

07 June 2007

China's decision to triple the tax on share trading could reportedly earn the government an additional US$40 billion in tax revenues.

According to a report in the Financial Times, the US$40 billion tax windfall would come about as a result of the increase on share stamp duty to 0.3% from 0.1%, announced last week in order to take some steam out the country's surging stock markets, and avert a sharp and potentially damaging correction in share prices.

The amount raised by the tax would be equal to about 7% of the central government's annual budget and almost equivalent to China's entire official defence budget, the paper said. Much of the windfall could be ploughed into infrastructure development in rural areas.

However, it appears that the measures put in place to cool the stock market may have worked a little too well, in the short term at least, as it emerged that stocks fell more than 8% on Monday, over concerns that further action may be taken by Beijing. Reports have revealed that in attempt to calm panic-selling earlier this week, which saw around $340 billion wiped off market value, editorials in official newspapers have been seeking to reassure investors that the measures were merely aimed at dampening rampant speculation on the stock market.

Investors are reportedly concerned that the government may consider the imposition of capital gains tax on share profits if the stamp duty hike does not work. But a less drastic measure has since emerged that could slow down the stock market: abolishing tax on bank deposit interest to encourage Chinese citizens to put their money in banks rather than invest on the stock market.

"Scrapping the interest tax may help increase bank saving and shift money back from the stock market," explaind Ni Hongri, a tax researcher at the State Council Development and Research Centre in Beijing, according to the Hong Kong Standard. "Stamp-duty increases will remain the government's first option, while interest-tax reform may be an option that follows."

Analysts, meanwhile, appear unconcerned regarding what is being viewed by many as a temporary slide on an otherwise still upwardly-mobile market.

The value of shares traded in China has soared over the last eighteen months with prices increasing 60% this year on top of 130% last year.

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