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Proposal to raise individual income tax threshold

By Hou Lei (chinadaily.com.cn)
Updated: 2009-03-06 17:28

Chinese lawmakers and political advisors have called for the government to raise the current 2,000-yuan personal income tax threshold to improve the fairness of the tax system and stimulate domestic consumption amid the global financial crisis.

NPC deputy Liu Chuanzhi, chairman of the board of computer maker Lenovo, suggested a threshold of 3,000 yuan ($439) in his proposal, as he believed the government should let people enjoy more benefits.

China has raised the tax threshold twice in recent years, from 800 yuan to 1,600 yuan in 2005 and from 1,600 yuan to 2,000 yuan in 2007. In spite of this, many believe that the current tax threshold is still too low.

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CPPCC member Liu Hongyu proposed a levy threshold of 5,000 yuan ($731). According to Liu, lowering the threshold could benefit the public directly compared with improving social welfare system with more government investment. Liu says this measure may help spur domestic consumption so as to push economic growth.

“Also, it is unreasonable for the tax income growth rate to be higher than GDP growth,” explained Liu. According to statistics from the Ministry of Finance, China’s annual individual income tax in 2008 totaled 372,2 billion yuan ($54.4 billion), up 16.8 percent from 2007, whereas the GDP growth rate was only 9 percent in the same period.

Since last October, personal income tax witnessed negative growth for three consecutive months due to the financial crisis.

A household income tax collection system is also proposed to replace the current individual income tax. “It is meaningless to simply raise the tax threshold. We need a thorough change of our income tax levy system,” suggested CPPCC member Liu Kegu, former vice president of the China Development Bank.

If the threshold is raised from 2,000 yuan to 2,500 yuan, Liu calculated that the wealthy, who pay a progressive income tax at the rate of 45 percent will save 225 yuan ($ 32.89), while the poor who earn less than 2,000 yuan can not benefit from it at all.

Liu advocated a comprehensive household income tax levy system which involves the income and spending of each family member.

The tax rate for people living in prosperous cities like Beijing and Shanghai are the same as those living in economically backward regions. Many people complain that the rich areas should enjoy a higher tax threshold as living costs in these regions are much more expensive.

Liu Heng, professor of the Central University of Finance and Economics and an advisor on China’s tax reform, revealed earlier that the tax levy will be adjusted to 2,500 yuan (US$365) startin g from next month at the earliest.

However, Jia Kang, director of Ministry of Finance’s Institute of Finance, said he did not anticipate any drastic hike of the income tax threshold in the short run.