Local govts' fiscal revenue growth slows

A total of 12 tax items are imposed on the development, sale and holding sector of the real estate industry. They include land value-added tax, deed tax, business tax and corporate income tax. Various other fees are also imposed on the property sector.

However, these do not include land transfer fees, a major component of government funds, which are not calculated as part of the public finance budget. In Guangdong for example, land transfer fees in the first half of the year totaled 117.5 billion yuan - more than a third of the province's public finances.

Nationwide, land transfer fees in 306 Chinese cities surged 60 percent to 1.13 trillion yuan in the first half of the year, according to 5i5j.com, a national housing brokerage. These fees are not shown in the current fiscal report.

"Excessive reliance on real estate income created conflicts of interest when it came to property curbing policies. They shaped the investment-led economic growth model pursued by local governments," said Feng Qiaobin, a finance professor with the Chinese Academy of Governance.

While local revenue growth slowed, expenditure increased significantly because local governments are required by the central government to increase their input into healthcare, education, agriculture and other sectors.

"Although fiscal revenue in the second half of the year is expected to grow steadily, the gap between revenue and spending is likely to widen, which puts mounting pressure on local governments," said Bai.

From Aug 1, VAT replaced business tax in nine industries across the region. This reform is expected to reduce by 120 billion yuan the tax paid by enterprises this year.

Some experts expressed fears local governments might increase fee collections to increase fiscal revenue. Tax and fees are two components of government fiscal revenue.

"Historically, every time tax revenues slow down, non-tax revenues surge. I am worried about whether the tax break for enterprises would be translated into the fees collected by local governments," said Li Weiguang, a professor of government finance at Tianjin University of Finance & Economics.