Beijing will require all companies to file details on employees' tax payments and will scrap tax preferences for unqualified companies after the mainland's revenue dropped in the first quarter of this year.
The State Administration of Taxation published a circular it issued to provincial-level tax authorities over the weekend, prodding those governments to 'close the tax loopholes and increase ... revenue'.
The watchdog also urged tax authorities at all levels to implement a reporting mechanism before the end of the year under which all firms would report personal-income-tax payments to government collectors.
Employers normally deduct income tax from workers' monthly salaries and turn in the money to tax authorities on behalf of individuals. But an annual summary statement of taxes paid by each employee is usually done only by government departments and public-service units, such as hospitals and schools.
'China is under pressure to boost government coffers after a decline in fiscal revenue,' said Li Weiguang , a professor of public finance at Tianjin University of Finance and Economics. 'But it all boils down to the efficient supervision of tax payments.'
The body said it had collected 1.4 trillion yuan (HK$1.6 trillion) of revenue in the first quarter, down 6.9 per cent from the same period a year ago.
The nation's revenue dropped for the first time in 12 years last October, a result of policy-related tax cuts and the economic slowdown.
Economists predicted a posted deficit of between 500 billion and 800 billion yuan.
The expected budget shortfall also overshadows Beijing's massive stimulus package, which was unveiled late last year to combat the economic downturn.
The watchdog urged local authorities to review the preferential policies given to firms, and cancel the tax holidays and tax cuts awarded to 'unqualified companies', though it did not define the term. It said it was studying a new, efficient collection system to ensure university teachers paid taxes on freelance income.
In 2006, anyone whose annual income exceeded 120,000 yuan was required to file payment details to tax departments, a move to stop evasion. Analysts said the tactic had failed.
Personal incomes of private business owners and self-employed professionals are normally low on company balance sheets while they pocket untaxed incomes through sleight-of-hand accounting.
'The loopholes will remain, and it won't be easy to work out an efficient mechanism in the near future to avoid evasion,' a personnel director at a state-owned firm in Shanghai said. 'Lots of people are still trying to dodge tax, and sometimes companies play a role, which makes the situation even worse.'
At some state-owned companies, prepaid cards are given out for transport or store purchases, but as they are not salaries, they help workers avoid paying taxes on 'extras'.