Move to improve tax rule means business

Workers could put a little more pay in their pockets if proposals to reduce individual income tax are adopted. The tax starting point is expected to rise from 2,000 yuan a month in wages to at least 3,000. These migrant workers were collecting their pay at a construction site in Jiyuan, Henan province. Miao Qiunao/For China Daily

In the second straight year of heated discussions on raising the threshold for individual income tax, national legislators and political advisers this time appeared to mean business.

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The State Council, China's Cabinet, on March 2 approved in principle a proposal to reduce the tax burden on medium- and low-income earners. Five days later, Vice-Finance Minister Li Yong said it was "beyond doubt" that the proposed adjustments would eventually go through.

Amendments to the individual income tax law are expected to be submitted next month to the Standing Committee of the National People's Congress (NPC), the top legislature. If all goes smoothly, the revised law could take effect later this year.

The amendments "will be the first practical thing" the administration will do for the people this year, Premier Wen Jiabao told a taxi driver in a Web chat with netizens just before the annual sessions of the NPC and the Chinese People's Political Consultative Conference (CPPCC), the top political advisory body. "The entire medium- and low-income wage-earning strata will benefit from this measure."

Wen said earlier that revisions in individual income tax were "priority No 1" in a much broader drive to tackle ever-widening income disparities in the next five years. The government reaffirmed last week that it would "firmly adhere to the path of common prosperity, so that all citizens can enjoy the achievements of the reform".

Details of the draft law have not been made public, but it is widely believed that the number of income tax brackets will be reduced from nine to six and that the tax starting point will be raised to earnings of 3,000 yuan ($456) a month, up from the current 2,000. Officials, experts and the public all agree 2,000 yuan is too low a threshold.

Earlier this month, about 57 percent of respondents in an online survey by the popular Internet portal Sina.com.cn said they want to increase the entry mark to 5,000 yuan a month or more.

NPC deputy Fang Qing, who is a primary school headmaster in Jinhua, Zhejiang province, agrees. "A teacher (in Jinhua), for example, earns 3,000 yuan a month. There's not much left after taking out the rent and basic living costs. If, say, they were to hire a babysitter to assist in raising a child, that's an additional 2,000 yuan.

"It would be too much of a burden if the teacher were asked to pay individual income tax on top of all that," he said. "The 3,000 yuan mark is still too low for people in Jinhua. Around 5,000 yuan would be a more or less reasonable level."

Other legislators feel the same way. On Thursday, a joint proposal to boost the income tax entry to 5,000 yuan was submitted to the Chinese parliament by 35 deputies, including Li Dongsheng, chairman of electronics giant TCL.

The rich skirt the tax

About 63 percent of China's individual income tax in 2009 was paid by wage earners, whose taxes are directly debited from their salaries, according to the Ministry of Finance. Numbers for 2010 haven't been released yet.

According to tax authorities in Yibin, Sichuan province, only 26 million Chinese, less than 2 percent of the country's population, pay the tax.

Individual income tax makes up just 6.5 percent of China's annual revenue, compared with more than 40 percent in the United States.

Under existing policies, low-income groups shoulder the bulk of the tax responsibilities of the rich, independent economist Andy Xie of Shanghai wrote in a commentary early this month. The top individual income tax rate is 45 percent but the company rate tops out at 25 percent, and Xie said the rich can set up companies and spend money for personal purposes out of business expenses.

Instead of narrowing the income gap, "the high tax rate weighs down white-collar workers, robbing them of the chance to become solidly middle class. (It) is pushing China toward a small super-rich class and a vast underclass," Xie warned.

Xie's view has been echoed by the public. The taxi driver who complained to Premier Wen online on Feb 27, for example, said he earns 2,300 yuan a month, just above the individual income tax entry mark. "It's not fair that wage earners have become the biggest Chinese taxpayers," the driver said in an online post.

The average wage in the non-private sector in 2009 was 2,728 yuan, meaning that any typical State employee would have to pay taxes.

Not many do pay, however. Tax evasion is so pervasive that it's found not just among the more affluent classes, but has almost become a cultural practice.

The issue was most recently addressed by revised regulations on fapiao (tax invoices) that took effect in February. Business expenses reimbursed from fapiao are a major source of income for many who seek to boost their non-taxable income, because the reimbursements are not included in their salaries.

As a result, vendors of fake fapiao are common in Chinese cities, according to Xinhua News Agency.

Some 780 million fake fapiao had been confiscated, and 12,900 cases of fake invoice-related crimes had been uncovered, from 2008 to late November, the Ministry of Public Security said.