China's Savings Interest Tax Here To Stay

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

19 May 2006

Beijing will resist pressure for the removal of tax on interest income because the government believes that the levy plays a key role in helping it to redistribute income from the wealthy to low income groups.

Liu Shangxi, deputy director-general of the institution of fiscal science research under the Ministry of Finance was quoted by the Shanghai Securities News as stating that the government receives billions of yuan in revenues from the tax, money which helps to subsidize programmes for low income groups.

"Interest tax plays a role of narrowing residents' income gap by using the collected money to improve low-income people's lives, " Liu explained.

It has been argued that the tax actually penalises low income groups more because they have a higher propensity to hold savings deposits than wealthier citizens, who tend to put their assets into investment vehicles.

The 20% interest tax was introduced on November 1, 1999, initially in a bid to encourage more domestic consumption, although Liu conceded that the effectiveness of the interest tax had been eroded by the state of the social security system, which he said has discouraged Chinese residents from spending, while encouraging them to save more.

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