China Economy

Mainland leaders face rough road to reforms

Strong opposition from powerful interest groups makes implementation of tax changes difficult

PUBLISHED : Thursday, 07 February, 2013, 12:00am
UPDATED : Thursday, 07 February, 2013, 5:16am


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Vital tax reforms are unlikely in the foreseeable future as Beijing's new leadership faces a daunting battle to win the approval of powerful interest groups.

The State Council on Tuesday issued guidelines on the long-awaited income distribution reform, vowing to increase minimum wages, limit the incomes of senior managers in state-owned enterprises and "enhance income adjustment by taxation".

The release of the plan after eight years of debates was already a triumph for the new leadership, but the road to implementation was not expected to be smooth with challenges from vested interests, analysts said.

In the guidelines, the cabinet said the government would reform property taxes by "improving the taxation system in property ownership and transactions" and "gradually expanding the pilot scheme of individual property tax".

"The leadership seems to be resolved to push ahead with the property tax reform," said Ma Guoxian, director of Shanghai University of Finance and Economics' Public Policy Centre. "But how to do it remains a question, considering expected opposition from corrupt government officials, large real estate developers, local governments and related ministries."

Local governments, relying heavily on land sales to make ends meet, try to sell land at high prices. Developers make profits on top of the unreasonably high land prices. Buyers pay the price of a property and various taxes.

While the mainland's property prices have soared in recent years, policymakers have tried to redesign the taxation system to reduce local governments' incentive to sell land at high prices - but without much success.

Chen Huai, former head of the policy research centre at the Ministry of Housing and Urban-Rural Development, said the individual property tax would be levied nationwide "for sure", but it was hard to predict whether it would be introduced in a year or two.

Government officials, heads of state firms and bank executives are key holders of property. Mainland media has given big coverage recently to reports of corrupt officials amassing properties.

The reform also touches the interests of the central and local governments. It would reduce tax revenues of the central government, while the small portion of individual property tax gathered is not expected to encourage local governments to reduce land price and rely on the new tax.

Reformists would also have to deal with large developers, which would be relied on to build government-subsidised housing and other facilities in the urbanisation initiatives to compensate for reduced property demand after introducing the tax, economists said.

Beijing also plans to impose a consumption tax on some big-ticket entertainment and luxury goods, according to the guideline.

"Such a new consumption tax might only make Macau and Hong Kong more favourable places for the mainland's new riches," said Lu Ting, an economist at Bank of America Merrill Lynch.