The draft bill that would authorize the State Council to suspend or cut the longstanding tax is likely to be adopted by China's national legislature when its Standing Committee ends a weeklong session today.

Yang Jingyu, chairman of the Law Committee of the National People's Congress (NPC), said yesterday that the majority of the lawmakers had agreed with the proposed authorization and suggested the bill be put to a vote in this legislative session.

Yang said the draft amendment to the income tax law said: "The imposure, suspension or reduction of interest tax on bank savings, as well as specific methods thereon, are subject to the decision of the State Council."

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The existing provision adopted in August 1999 reads: "The timing and method of taxing interest earned on savings accounts are dependent on the State Council." Later that year, China began to levy a 20 percent tax on interest earned on personal savings.

Banking insiders said that depositing money is less attractive than funds and stocks, so the interest tax adjustment will have a limited impact on the stock market.

But canceling or reducing the interest tax will significantly affect the government securities and life insurance products, both of which carry similar interest rates to the deposit but have no interest tax. If the interest tax is reduced or abolished, some policyholders may surrender their policies.

Currently, the benchmark one-year deposits carry an interest rate of 3.06 percent. However, given the 20 percent interest tax, the actual yield is just 2.45 percent.

That return is below the inflation rate as measured by the consumer price index, which hit a two-year high of 3.4 percent after rising three percent in April and 3.3 percent in March.

Central bank statistics showed that China's household deposits posted the largest monthly drop in May, decreasing 278.4 billion yuan, due to large sums of money flow from deposit accounts into stock trading accounts.

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