Expect more consumption taxes, as government revenues continue under strain

Mainland expected to levy more tax on luxury products in attempt to crack down on ostentatious spending and replenish tax income

PUBLISHED : Tuesday, 24 January, 2017, 4:53pm
UPDATED : Tuesday, 24 January, 2017, 10:45pm

The mainland is expected to raise import tax on luxury products in attempts to crack down on ostentatious spending and help replenish dropping tax revenue, according to market watchers.

The Chinese authorities started imposing an additional 10 per cent tax on “ultra-premium cars” in December with a price tag of more than 1.3 million yuan.

They also halved the levy on upscale skincare and cosmetics to 15 per cent but exempted mass products altogether from paying, from October 1, 2016.

Market watchers say such moves reflect ongoing reforms on excise tax to “guide [more] rational levels of consumption”.

“We are expecting more tweaks [to be made] in consumption tax in the coming years as the authorities are given more space to ramp up reforms in the segment, once they have dealt with the overhaul of the value-added tax (VAT) framework in 2016,” said Kevin Zhou, an E&Y tax partner in Shanghai.

Chinese tax officials embarked on major structural changes to VAT last year, in an effort to align the country’s indirect tax policies with international practises.

The country completed its VAT overhaul on May 1 last year, after which four key sectors – finance, construction, property and consumer services – were subject to VAT instead of business tax.

It marked an ambitious effort to align the country’s indirect tax policies with international standards and nurture services, which made up more than half of GDP for the first time in 2015 and grew faster than the rest of the economy.

We are expecting more tweaks [to be made] in consumption tax in the coming years as the authorities are given more space to ramp up reforms in the segment, once they have dealt with the overhaul of the value-added tax (VAT) framework in 2016

Zhou said the new excise tax on certain products are likely to be based on retail prices, rather than factory-gate prices, expanding the government’s tax base as retail prices are higher than manufacturing ones.

Those examples of consumption tax will help replenish falling tax revenue amid a slower economic growth, he added.

Gao Liqun, a tax partner with Deloitte in Shanghai, agrees that the expected overhaul could generate more fiscal income for Beijing, even though it’s not the main purpose.

The mainland is facing slower tax income growth against weaker economic activities.

An unnamed authority said in a People’s Daily commentary last year that China’s economy would undergo an “L-shaped” curve, indicating persistently slower growth ahead.

The ambitious VAT overhaul is being touted as a tax cut which is estimated to have trimmed tax income of 500 billion yuan in 2016, though certain businesses have complained about it ending up being more of a higher tax burden than tax relief.

In 2016, tax revenue rose 4.3 per cent year-on-year to 13.04 trillion yuan, said finance ministry on Monday.

But annual tax revenue growth has declined for six straight years since 2010, when tax revenue grew a sizzling 23 per cent.

Gao said tax rates could be marked up on premium liquor and cigarettes, as well as ultra-luxury items such as private yachts and private club membership fees, such as golf.

She said the potential extra consumption tax on retail prices could be limited to products whose main sales channels are big shops, as it is easier for the tax authorities to track and collect payments.

“It would be very difficult to collect tax on cigarettes sold in corner shops, for instance,” she said. “That’s why such taxes are mainly levied on manufacturers or wholesalers, except silver and gold jewellery.”

She also noted legislation on excise tax could be the next step, after lawmakers are done with its ongoing plan on value added tax, which are scheduled to end by 2020.

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