Prospect of property tax worries developers on mainland

PUBLISHED : Monday, 01 June, 2009, 12:00am
UPDATED : Monday, 01 June, 2009, 12:00am

The central government has put the levying of a property tax back on the table, an unexpected move that could pour cold water on the warming mainland real estate market.

Analysts said the tax was aimed at giving local governments a steady income stream to finance property- related public investment. However, it is unlikely to be launched in the next two years, as there is still a lot of work to do, such as deciding on the tax base and how to set the rate.

The issue was raised in a May 25 State Council document about 'deepening the economic reforms in 2009'. Among the proposals was the reform of tax regimes, including income tax, city maintenance tax, resources tax and environmental tax. It also mentioned that the feasibility of levying a property tax was being studied by the Ministry of Finance, the State Administration of Taxation, the National Development and Reform Commission and the Ministry of Housing.

No details were given, but the message was strong enough to jangle the nerves of some developers and property owners.

'It has been talked about for many years. Now the central government has raised it again in the face of rising home prices,' said Kalvin Zhu Guoqiang, the chief operating officer of developer Shenzhen Investment.

The announcement was seen as a message that the government wanted to have some measures on hand to cool speculation if prices rose too fast, he said.

It is thought the basic framework would streamline current property-related taxes, such as the housing property tax, city real estate tax, land value-added tax and land leasing fees. Similar to Hong Kong's rates, they would be calculated on the net assessable value of land and property on an annualised basis.

Experts believe commercial properties would be the first to be charged.

In 2007, the State Administration of Taxation picked 10 provinces and cities, including Beijing, Shenzhen, Dalian, Jiangsu and Chongqing, in which to levy 'virtual property taxes'. The exercise will be done this year, although no money will be collected.

The central government had originally planned that property owners in the 10 areas would start paying the tax last year, but the global financial crisis put paid to that.

Jing Ulrich, the managing director and chairman of JP Morgan's China equities division, said the spectre of a property tax had caused concern about it potentially slowing recovery in a market that had made considerable progress in recent months. Government support measures, combined with aggressive interest-rate cuts and accelerated price reductions, have resulted in a rebound in mainland home sales.

'It is important to recognise that the property slowdown in 2008 was brought about not only by the worsening global financial crisis but also by domestic tightening measures introduced to counter speculation and spiralling prices,' said Mrs Ulrich.

Royal Bank of Scotland Group said average home prices in some major cities had risen since the beginning of the year, with transaction volumes rising at an even faster pace.

Cao Fuli, a partner at law firm Jones Day, said: 'If the land use right fee is converted into a tax, it would reduce the property purchase price and increase holding costs. The price drop may encourage people to buy, especially for self-use.

'However, if it is merely to add an additional tax, it would increase the costs of holding property, which probably would hurt the market.'

Albert Lau, managing director of property consultants Savills Shanghai, said it all depended on the rate of the tax.

'A 1 per cent or more annually would be too high. Residents in major cities probably could afford it, but it would be a burden on second-and third-tier cities,' he said.

But Mr Lau did not believe the central government would launch such a tax in the short term, as it would go against the plans to stimulate the economy through encouraging property buying.

Mr Cao agreed, saying it would be difficult to introduce the tax next year, as many problems still had to be addressed.

'There are not only technical problems but also important policy issues. Tax bases and tax rate, for example, would be fundamental to the tax system,' he said.

'There is some thinking about converting land use right fees into property tax, which would change real estate pricing. Currently, we have a property tax where individuals are exempt for self-used residential property. Rental properties should be subject to property tax.

'However, in many locations, the local government applies a composite tax rate [for example, 5 per cent of gross rent in Beijing] for residential rental property owned by individuals, to encourage the rental market. The government needs to decide whether to overhaul the current property tax system.'

Mr Zhu said tax offices still needed to do a lot of work to build databases on the amount of land and number of properties.

Intensive training of staff to conduct annual appraisals of properties was also needed, he said.

'Another major factor is that local governments are not eager to launch it at the moment, as the real estate market is on the way to recovery. They worry that any new tax could dampen market sentiment,' he said.

'I do not expect that the tax will be imposed in the next two to three years.'

However, experts said the central government would eventually impose the tax, which is popular in many developed cities in the world, as it would provide a steady revenue source to local governments.