China Urged To Adjust Taxation Of Interest Income

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

16 November 2004

Experts have suggested that China should reform the way that it taxes interest income in an attempt to boost the spending propensity of the nation’s savers, China Daily has reported.

According to Zhang Peisen, a senior researcher at the State Administration of Taxation, the current policy on interest tax is out of kilter with China’s wider macroeconomic policies.

"The 20 per cent tax rate on interest earnings reduces the purchasing power of medium- and low-income residents who must bear increasing inflationary pressure amid the country's fast growing economy," Zhang noted in the report.

With figures showing that inflation accelerated this year, Chinese savers are in effect facing negative rates of interest, and observers believe that the government’s tax policy on interest income is failing in its objective of encouraging more people to spend rather than save.

"Smooth co-ordination between monetary policy and fiscal policy is important for China to establish a market-oriented economy," Zhang explained.

This view was supported by Qi Jingmei, a senior economist with the State Information Centre, who noted that a lack of investment options gave people little choice but to deposit money into bank accounts.

"The tax failed to meet its original goal to stimulate investment and consumption," China Daily quoted her as observing.

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