Hope for reduced income tax burden seen from draft

Further individual income tax reductions could benefit Chinese taxpayers beginning next year, as the tax authority unveiled a draft list of specific additional deduction items for public opinion on Saturday.

Taxpayers who have expenditures related to six items－children's education, adult education, treatment of serious diseases, livelihood of seniors, housing loan interest and apartment rents－will enjoy additional deductions to their taxable incomes, according to the Ministry of Finance and the State Administration of Taxation.

It was the first time that the country added this list of "specific additional deductions" into its initial establishment of a comprehensive deduction system, as a significant part of the revised Individual Income Tax Law.

Public opinion will be collected during the coming two weeks, according to a document on the ministry's website.

The final version of this tax deduction regime is scheduled to be unveiled by the end of this year, before the country's new Individual Income Tax Law takes effect on Jan 1, 2019, said the document.

According to the draft plan, expenditures on children's education could be deducted at a fixed standard of 12,000 yuan ($1,732) a year, or 1,000 yuan per month.

Expenses on adult education could be deducted at between 3,600 to 4,800 yuan a year.

For medical costs incurred treating serious illness, the yearly expenditure spent by the patient above 15,000 yuan could be deducted, with an annual cap of 60,000 yuan.

For interest on loans for first-time homeowners, a monthly deduction of 1,000 yuan will be allowed. For housing rents, the deduction will vary between cities, ranging from 800 yuan to 1,200 yuan a month.

If taxpayers are supporting parents aged 60 or above, they could get a monthly deduction of 2,000 yuan. Children can enjoy the entire 2,000 yuan deduction if they have no siblings, while the sum will be divided among siblings if there is more than one child in the family.

"The size of the tax cut will be greater than expected," said Sun Gang, a researcher at the Chinese Academy of Fiscal Sciences. "The policy considers both fairness and practicality to ensure the process of collecting tax is as easy as possible."

Experts have calculated that a taxpayer who earns 20,000 yuan per month can enjoy a deduction of at most 4,600 yuan per month beginning next year. Based on the newly revised individual income tax threshold set at 5,000 yuan per month, the taxpayer needs to pay tax of 830 yuan, compared with 1,590 yuan before the deduction, or a drop of 47.8 percent.

Gan Li, a professor at Southwestern University of Finance and Economics, said that "the tax deduction for children's education is also at a high level compared with some developed economies, such as the United States and Canada".

The top legislature passed the amendment to the Individual Income Tax Law on Aug 31, which refined the law in areas including optimizing the tax rate structure and adjusting tax brackets to reduce taxpayer burden, especially for taxpayers at low and middle income levels.

The amendment has raised the threshold of personal income tax from 3,500 yuan to 5,000 yuan per month. The revision is seen as the most significant such breakthrough in the past 38 years. It can be expected that the majority of the existing individual income tax rules and regulations will be reviewed and modified according to the new law.

The tax reform will have significant impact on enterprises and their employees, from China and foreign countries, said Edmund Yang, a partner of PwC's tax and business advisory team. Enterprises may have challenges including additional burdens arising from tax filing and compliance risks.

"We are expecting the subsequent release of detailed implementation rules and other relevant regulations to complete the picture of the new Individual Income Tax Law and its regime."