CHINA is to introduce personal income tax and a far-reaching Value Added Tax to help reign in the economy and put the central government's accounts in order. Although the tax on individual income is designed to address the widening gap between rich and poor, officials gave assurances that people who worked hard would be able to accumulate wealth. Finance Minister Liu Zhongli, elected to the post at the National People's Congress plenum in March, said the tax laws would be simplified and VAT introduced on a wide range of products gradually, although he gave no indication of the percentage or timetable. ''The VAT will be applied from the very early stages of manufacturing right up to the retail business,'' he said. The Director of State Administration of Taxation, Jin Xin, said special commodities such as cigarettes, wine, petrol and limousines would be taxed. Non-commodity business, such as the service industry, will also become a new source of tax revenue. Attempts to introduce any form of consumer tax, whether at the point of manufacture or sale, has met strong opposition throughout the world and has been consistently ruled out for Hongkong as troublesome. But Mr Liu said the imposition of a broader income tax would be part of the overhaul. ''In the past we followed a policy of low salaries and full employment,'' he said in an interview with a German business daily, Handelsblatt. ''People had low income but they had no taxes to pay. Now we are introducing the tax declaration system: if you don't declare you are treated as a cheater. ''Our specialists are still thinking about how high the personal income tax will be.'' Mr Liu admitted that ''some people in China have become very rich'' with 50 million yuan (HK$67 million) or more. But he said he did not think there were a million millionaires. He said China would start with a ''relatively high'' tax threshold so people would be able to adjust. ''It is not desirable to tax the low income people, but we will not have taxes as high as in European countries,'' he said. Mr Liu said the problem of evasion by companies was ''more obvious'' because ''we are in a transition''. Mr Jin was quoted in the People's Daily as saying a unified tax law that treated Chinese and foreign companies equally would be introduced. He said all enterprises were to pay 33 per cent tax regardless of their ownership. The tax revamp is one of a number of measures being considered to bring the mainland economy under control and rebuild the country's currency and financial markets. Mr Liu said the imbalance between supply and demand triggered by the rapid growth of the economy had put pressure on the renminbi. He attributed the imbalance to the sharp rise of investment in assets, which had jumped 68.7 per cent from January to April this year. ''The way to correct this is to reduce and slow down the investment,'' he said. He also blamed psychological reasons for the depreciation of the renminbi, saying: ''As they see that the dollar is appreciating substantially they hold on to it instead of putting dollars into the swap markets.'' Mr Liu said the Government also planned to raise the deposit and lending rate of banks to encourage savings and reduce money supply. He conceded that the raising of interest rates by 1.9 per cent in mid-May ''seemed to be not enough''. The central Government would ''exercise restraint'' in providing loans and credits to sectors such as real estate and development zone projects, while ensuring funds for production of sought after goods, said Mr Liu. He said he had no idea about reports that his ministry would force state-owned companies in Hongkong to remit money to China to beef up foreign currency holdings. Bracing for a deficit budget, the finance chief admitted it was simply impossible to have a ''clean budget'' at this stage, as China was developing at a rapid pace. ''The deficit is not the result of recession, but high growth. In the current year the deficit will be 3.2 per cent of the Gross National Product. That's not too high,'' Mr Liu explained. He maintained that the central Government must provide funds for infrastructure facilities and agricultural production to cushion against damages incurred by disasters or bad weather. Spending, however, would be cut on the building of fancy hotels, department stores and shopping malls, and the manufacture of products such as television sets, whose market had become saturated, said Mr Liu. Other money-saving measures include the trimming of China's bloated bureaucracy and reduction of the purchase of luxury cars. Although China would mainly rely on domestic funds through the issuing of bonds and treasury bills, Mr Liu said it would still tap the international capital market through borrowings. Conceding the development of its financial markets was ''a little bit behind in the current reforms'', he said the direction of reform was towards a more open financial system. Mr Liu stressed that the approach to reforming the financial system step-by-step was ''the right one''. He did not say when China would totally lift restrictions on the operation of foreign financial institutions on the mainland, such as transactions through renminbi. Mr Liu said China was concerned about the future development of stock exchanges on the mainland, adding that one major problem was the lack of a sense of risk among individual investors who thought buying of shares would only result in profit. ''That's the reason we will only allow Shanghai and Shenzhen [to have stock exchanges] . . . We want strict legal regulations to rule the stock exchanges.'' The minister also maintained that the stock exchange in Chengdu, the capital of Sichuan province, was illegal. Set up by a hospital, the stock exchange attracted tens of thousands of people to buy and sell shares. He said the provincial government had been ordered to close the exchange, but admitted it was ''a gradual process'' because so many people were involved. ''If this market is allowed you will see that each province will want to have a stock exchange. That will cause chaos,'' Mr Liu said. On the sharing of tax revenue between the central and regional governments, Mr Jin suggested a new distribution system that would allow localities to ''share more economic gains''. But he cautioned that reforms must be pursued carefully. with the full support from local governments.