China economy

China set to cut tax rates for middle classes in bid to stimulate consumer spending

Monthly allowance expected to rise by 40pc to US$775, while mortgage interest payments, education and medical costs to be made tax deductible

PUBLISHED : Tuesday, 19 June, 2018, 4:20pm
UPDATED : Wednesday, 20 June, 2018, 11:13pm

China’s middle classes could soon be much better off thanks to a raft of personal tax incentives under consideration by the government.

As well as raising workers’ monthly personal allowance to 5,000 yuan (US$775) from 3,500 yuan, the changes will make interest payments on mortgage loans, and education, training and medical expenses tax deductible.

The proposals have already been drawn up and are expected to be endorsed by the National People’s Congress, China’s legislature, this week, Xinhua reported.

The changes come at a time when consumer spending is under serious pressure – retail sales in May slowed to their lowest level in 15 years – as Chinese households feel the pinch of rising mortgage bills and falling wages.

At the same time, the government’s revenue from personal income tax in the first five months of the year rose 20.6 per cent from the equivalent period of 2017.

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Under the current system taxpayers can claim for very few deductibles against their tax bills, so the planned changes, although unlikely to take effect for several months, have been well received.

“It’s the best news this year, because my property debts are killing me,” said Eli Mai, a sales manager from Guangzhou in southern China’s Guangdong province.

“My income has actually dropped from the same period of last year because the market is so bad. In the past couple of months, my wife and I have only just managed to cover our monthly repayments, and I have had to ask my father for a loan to help with our living costs.”

Mai said the couple paid about 25,000 yuan a month in mortgage repayments on loans of about 3 million yuan taken out against two flats.

If approved, the amendments will be the first significant changes to China’s personal tax system for seven years. Lawmakers and political advisers have long called for consumers’ tax liabilities to be lightened as a way to stimulate consumption.

Against the backdrop of slowing infrastructure investment and growing headwinds for exporters – not least because of China’s trade row with the United States – Beijing is keener than ever to encourage people to spend.

In the first quarter of this year, revenue from the sale of consumer goods in Guangzhou was almost unchanged from the same period of 2017 at 224.1 billion yuan, while in the neighbouring city of Shenzhen, the figure rose by just 2 per cent to 133.2 billion yuan.

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China’s total tax revenue in 2017 rose 10.7 per cent from a year earlier to 14.4 trillion yuan, its first double-digit increase in five years, according to figures from the Ministry of Finance. Of the total, revenue from personal income tax surged 18.6 per cent to 1.2 trillion yuan, it said.

The last significant change to China’s individual income tax system came in 2011, when the personal allowance was raised to 3,500 yuan from 2,000 yuan, and the number of tax brackets was cut to seven from nine.