Chinese Try Every Which Way To Bump Up Tax Collections

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

07 October 2002

Although tax collection in China is superficially on a roll, with overall tax revenues up 11% on the previous year in the 8 month period to the end of August, and income tax receipts up by 24% over the comparable period last year, the Chinese government is spending the money more quickly than it can collect it, and is facing a ballooning fiscal deficit as it pours resources into under-developed areas.

Hence the government's continual emphasis on increasing collections, and a stream of measures designed to counter widespread tax evasion. But a new report from Deloitte Touche says that the authorities face an uphill struggle to crack down on tax dodgers due to the mainland's preference for dealing in cash. "Many business transactions are conducted in cash instead of through banks because of the tight controls on foreign exchange," said Kaiser Kwan, a tax partner with the Field Audit and Tax Investigation Team.

Mr Kwan says that in an attempt to deal with this problem, China has established a computer database which enables comparisons between different companies in the same industry, pinpointing for investigation those that are paying unusually low amounts of tax. He says that under a new tax collection code being introduced on 15th October, this will allow the authorities to 'name and shame' companies which are out of line.

Under article 76 of the new Collection Law, tax authorities would be able to "disclose regularly the information of taxpayers in arrears via the electronic media, on television, newspapers, periodicals or the Internet". And under article 86, tax authorities can check the books of taxpayers for current and previous years, something that was of doubtful legality under previous rules.

In March, China announced an overhaul of its income tax system aimed at centralising control over its revenue sources and bringing the tax regime closer to international practices, but even with all the changes now in place, the tax system probably needs fundamental reform. Last week the Far Eastern Economic Review observed that: 'China is clearly growing nervous about taxes and for good reason. The government needs a stable source of revenue to keep a lid on stresses racking the economy - from layoffs to bad loans to pension liabilities. If left untended, these fissures in the economic system could bring China's remarkable record of economic growth to an abrupt halt.'

The report continued: 'Much is at stake. Beijing is pumping so much money into underdeveloped regions that some areas with small tax bases tap the central coffers for up to 90% of their budgets. Even more worryingly, the fiscal deficit is only part of the government's potential liabilities.'

Chief China economist at Morgan Stanley, Andy Xie told the FEER: 'China has to simplify and lower the rates before individual taxes can be collected. I don't think it'll work otherwise. They can control employees of large enterprises, but they can't control the rest of the population. If they have 15%-20% tax rates then it can work.'

Individual income tax in China is paid on a scale rising to to a maximum of 45 per cent, while enterprise income tax is 33 per cent for local companies and 15 per cent for foreign firms. There have been persistent hints that the Government is planning to level up the regime for foreign and local companies after its WTO entry.

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