Proposed change set to increase spending power
The State Council approved in principle, on March 1, proposed amendments to the individual income tax (IIT) law. It is now being examined by the Standing Committee of the National People's Congress. While details of the amendments were not disclosed, a speech by the Minister of Finance, Xie Xuren, at the 12th China Development Forum on March 20 indicates measures may include raising the tax exemption threshold, adjusting the progressive tax rate structure and strengthening measures on regulating high-income taxpayers.
China introduced the IIT law in September 1980, with a tax exemption threshold of 800 yuan (HK$951), but, over the past 30 years, the tax threshold has only been increased twice to 1,600 yuan in 2006 and 2,000 yuan in 2008. There are nine progressive tax brackets with tax rates ranging from 5 per cent to 45 per cent. With the upcoming reform, the tax threshold is expected to be increased to 3,000 yuan.
William Chan, partner, tax services of Grant Thornton Jingdu Tianhua, says there is a real need for China to raise the tax threshold because purchasing power has been eroded by high inflation, especially home prices.
Karmen Yeung, tax partner, KPMG China, says present IIT regulations do not match salary and living standards on the mainland. The tax exemption threshold is too low and the tax bracket too narrow. As a result, the effective IIT burden for individuals is too high.
She says the main purpose of the amendment is to reduce the tax burden of the low- to middle-income groups and to narrow the income gap between the high-income and middle- to low-income groups. 'We also expect this amendment to increase the disposable income of taxpayers and improve the living standards of low income groups.'
Jim Chung, tax partner, Deloitte China, says the proposed amendments are good news to most individual taxpayers who are from the low-income group. To regulate the salary gap between high-income and low-income individuals, the government will try to collect more tax from the high-net-worth individuals and less from middle- to low-income earners.
Chung says compared with an adjustment of the threshold, the proposed reduction of progressive tax rates is another way of reducing the burden on taxpayers. 'Its effect is far greater than an increase in tax threshold since the gap in each income level will be expanded. Hence, this is also the key reform area that would have greater implications on taxpayers and tax revenue to the tax bureau.'
Jacky Chu, tax partner of PricewaterhouseCoopers Hong Kong, says increasing the tax threshold to 3,000 yuan will have a minimal effect on fiscal revenue because the country's IIT income accounts for 6 to 7 per cent of the overall tax revenue on the mainland. 'However, if the tax bands and top marginal rate are also reduced from 9 to 5 bands and from 45 per cent to 40 per cent, respectively, as reported by some Chinese media, the overall implication could be more significant.'
Gary James, tax partner at BDO, agrees that a bolder measure would be to lower the progressive tax rates and widen the tax bands. 'At present, the IIT rates range from 5 per cent to 45 per cent. It may consider lowering the top bracket to below 45 per cent.' He says in order to achieve a better distribution of personal wealth, China could introduce more deduction items, such as allowances for child, dependent parents or education.
Chan agrees that the tax brackets should be reduced from 9 to 5 to simplify the tax collection system, but in terms of redistributing the nation's wealth, the present IIT system is limited because income for most wealthy individuals is generated not so much from salaries and wages, but from other sources, such as from business dealings, the housing market, stock market and other investments. He hopes China can make fundamental changes to its IIT system and seek to levy tax on other income, such as gains from the property and stock markets, and to allow deductions for pensions and medical expenses rather than just increasing the tax threshold.
James says: 'There are other ways such as introducing a flat rate for the high income group. However, given the fact that there is little deductions available and that this would be viewed as a very drastic change, this would [be] unlikely [to] happen in the near future.'
Chu adds that China should consider factors such as an individual's household income and family size in IIT calculations, and the tax threshold could also consider average income levels and living standards in different cities.
'For example, in 2010, the average annual income was 31,838 yuan in Shanghai, but only 13,855 yuan in Qinghai, yet people in the two cities are entitled to the same threshold of 2,000 yuan,' he says.
Yeung agrees. 'To achieve better distribution of personal wealth, the government may consider linking the monthly deduction with the CPI [Consumer Price Index], or living standard, in each city. The government may also consider allowances based on family size, just like child allowance in Hong Kong.'