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WEALTHY BUSINESSMEN are under attack for allegedly flouting tax rules and evading personal taxes. Premier Zhu Rongji lashed out earlier this month at the mainland's 10 richest people for not paying personal taxes last year.

'Why do some rich people not pay,' Mr Zhu asked.

'This is not normal. If the government has no money, how can it do anything? Personal income tax should be paid. My [monthly] wages exceed 800 yuan [about HK$749.76], so I pay.'

Mr Zhu found the reason behind the problem was that 'they had included their personal income in that of their factories and their wages were included in the factory's pre-tax expenditure'.

To a public increasingly unhappy with the growing income disparity - especially the recent finding that most of the taxes are paid by those with fixed income rather than by the rich - Mr Zhu's scathing attack is timely.

According to mainland media, the tycoons dug into their pockets to pay personal taxes soon after the criticism. But the premier's high profile remarks, although popular among the public, failed to strike a chord among many of the fellow private business owners and those who claim to be familiar with tax rules.

They say that the tycoons' act of paying up is a show of support to the premier or a submission to public pressure rather than an admission of guilt.

For one thing, including the salary of a business owner in the pre-tax income is an internationally accepted and legal practice of avoiding unnecessary taxes, the media says.

Another is that most business owners have paid large amounts of corporate tax and sometimes dividend tax. Private businesses have become increasingly important in government income, evidence shows.

Zhang Ping, an owner of a printing shop in Shenzhen, did not think the premier's comments were sound.

'Yes, I give myself 2,000 yuan of salary a month, on which I pay 120 yuan only of taxes. But I also paid hundreds of thousand of yuan in corporate taxes in the past months. What is wrong with it? I have not evaded any tax.'

Mr Zhang's response is representative of the business owners, who are unhappy with the double or triple taxation on their income. According to tax specialists, one of the most important reasons why business owners paid little salaries to themselves is because of certain flaws in the taxation system.

Based on the tax system, corporate tax is 33 per cent while personal tax ranges from 5 to 45 per cent. Theoretically it is advantageous for the boss to pay himself up to 60,000 yuan without triggering higher personal taxes, according to Zhu Qing, director of the Finance Department at the People's University.

But in reality, very few businessmen pay themselves this amount in salary, he said. According to tax regulations, the maximum salary one can deduct from pre-tax income is 960 yuan, despite a much higher income that may have been drawn. The non-deductible part will be needed to pay personal tax, as well as corporate taxes. If a dividend is prescribed, another 20 per cent of dividend income needs to be paid.

'Therefore there is no incentive for the business owners to pay themselves salaries,' Professor Zhu said.

'While in Western systems, salary has been regularly used as a legitimate way of reducing total tax burden as any reasonable amount is fully deductible before income. For private business owners, one has to combine the personal tax and corporate tax together to come up with a more meaningful picture.'

But Premier Zhu has reasons to be angry. The tax system has done little to reduce income disparity. It has enlarged it.

According to statistics, the richest 20 per cent controls 80 per cent of the country's wealth, yet they contribute less than 10 per cent of personal taxes.

Tax departments in different provinces have responded quickly to the open criticism by the premier. Guangzhou's Tax Bureau issued a circular following the state tax department's order to set up individual tax files for private entrepreneurs. According to the notice, the tax department will target those private businessmen, joint-venture partners, merchants and construction contractors who have paid an annual income tax of more than 300,000 yuan. But the notice did not specify how it would identify those who made large incomes but paid little in taxes.

In cites such as Beijing, Shanghai and Guangzhou, tax officials have been chasing after film stars, pop singers and other celebrities for tax payments. This has triggered criticism that a monitoring system based on fame is flawed and misses low profile tax evaders.

In Shenzhen, the government promises to introduce a 'systematic way of screening the key tax payers'. One approach is to adopt a close watch on the key members of 'high income enterprises in the high earning industries'.



Premier views tax avoidance by business as a bit rich