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China Deploys 1994's Idle Taxes
Summary:Tax reforms introduced in 1994, when the tax collection rate was only 50%, included provisions for many new levies on stocks and real estate that are only now being applied.

By Xi Si(席斯)

News, Cover,

Issue No. 538, Sep 26, 2011

Translated by Song Chunling

Original article: [Chinese]

If you earn 10,000 yuan on a stock market investment, you may only find 8,000 yuan in your account since the missing 2,000 yuan has been taken as individual income tax on stock transfers.

 Although currently this is just a proposal, with so many “idle taxes” (休眠税) being revived lately, the individual income tax on stock transfers may be next in line. 

"Idle taxes" are taxes that have been formally introduced but hardly ever implemented. Due to limitations and the specific circumstances of taxation, some taxes were suspended following the introduction of subsequent policies and other taxes were never successfully collected. In recent years, these “idle taxes” are being revived.

 From Jan 1, 2012, Beijing will start charging corporations a local education surtax, the total tax receipts from this surtax across the various provincial and municipal governments in China adds up to about 100 billion yuan every year. However, the local education surtax is not the only "dormant tax" (休眠税) that will be awakened from its slumber. 

 Property tax, incremental tax on land value and a tax on second-hand housing transactions have all been collected in recent years. These taxes have increased state revenue by roughly 500 million yuan.

 From January to August, tax revenue in China totaled 6.49 trillion yuan, an increase of 28.3% compared with the same time last year. State revenue also increased by 30.9% to 7.43 trillion yuan.

 Gao Peiyong (高培勇), head of the Institute of Population and Labor Economics at the Chinese Academy of Social Sciences (CASS) suggested that the tax reforms in 1994 have set up the basis for the current rapid growth of tax revenue.

“Tax categories at that time were very complete and were written into law. Some taxes weren't collected only because of special policies to suspend them or limitations at that time.” An official in Chongqing agreed with Gao, adding that some of those special policies are just government documents, and the procedures required to either initiate or strengthen the collection of these taxes is not very complicated since they already have legal status.

 The Revived Taxes

Property tax, incremental tax on land value and a tax on housing transactions in the secondary market are all taxes that have been revived.

Property tax has always been a sensitive topic for the public, and it remains the focus after Shanghai and Chongqing started piloting it. According to the provisional regulations on property tax in 1986, property tax should be paid by the owners of the property, including authorities, institutions, enterprises and individuals for business and residential properties. However in the additional exemption policies, the residential properties for individuals are exempted, since most apartments and houses at that time were public housing and wouldn't have generated much revenue. However with the reform of the housing system around the country and the real estate business, individuals have become the major owners of housing, and thus property tax is also supposed to be the main revenue income for local government in the future.

  “The legal procedures are relatively easy, and the amended regulations only need to be examined and approved by the State Council,” said a local tax official.

 The incremental tax on land value and a tax on second-hand housing transactions also went through the same procedures.

 In 2005, in order to control the high price of housing, many provinces in China released documents to charge tax on secondary market housing transactions, which is made up of 5% sales tax and personal income tax of 20% of the profits or 1% of the sales price. An official in Chongqing says that the these two taxes hadn't been covered by previous exemptions, but hadn't been successfully collected in the past.

 The “revived” sales tax and personal income tax for secondary market housing transactions have greatly increased revenues in the next few years. However despite the tax collector's desire to rein in housing prices, house buyers are absorbing almost all of the taxes costs. A buyer in Guangdong paid up to 130,000 yuan in taxes for the two-million-yuan house he bought in April.

 Moreover, the document about personal income tax on restricted stock trades also surprised investors. Up until recently, the tax on stock transactions has been exempted according to an individual document issued by the Ministry of Finance and the State Administration of Taxation (SAT). However as of Jan 1, 2010, a "personal income tax" of 20% is charged on the exchange of restricted stocks, which has increased the personal income tax on property transfer by 70%. Data from SAT shows that average tax paid per person is 93,700 yuan, with the largest payment around 41.3 million yuan.

 Meanwhile, Beijing will start charging corporations a local education surtax from Jan 1, 2012 by 2% of the total sum of the value added tax, sales tax and consumption tax. Some provinces and cities have started charging the surtax this year and the total tax take from this surtax across the various provincial and municipal governments in China is estimated to be about 100 billion yuan every year. The education surtax was introduced in 1986. However before 2010, it was only applied by a few provinces and cities.

Another idle tax is the price regulation fund set up in the 1980s, which was intended to provide a reserve and compensation for producers and needy families when the price of grain, oil and other subsidiary food was too high. “I have never heard of or collected this tax”, says a young local tax official in Jiangsu.

 However with the high inflation rate and the high price of meat, eggs and vegetables, the price regulation fund has come back to life in many regions. “The price regulation fund was not exempted but nobody collected it in the 1990s,” says an official from the local National Development and Reform Commission. “Regulations on the price inflation fund” were established for local governments according to the price law, while the standard of charging varies in different provinces.

 As for the incremental tax on land value; areas around Beijing and Tianjin started collecting this tax in 2007. “Accounting for the business cost is very complicated,” says Chen Zhaochun, the president of a real estate company. Also the rate at which tax is levied has gradually risen from 0.5% to first 2% and now 5%.

 The incremental tax on land value was introduced in 1993 but had been “half sleeping” for 13 years before 2006, with some cities like Guangzhou and Shenzhen never collecting the tax and others collected it in low volumes. In the first 10 years, the total collection was less than 10 billion yuan, while now - five years after the incremental tax was “revived” - collection is up to more than 300 billion yuan.

 The Foreshadowing Tax Reform in 1994

Professor Gao from CASS thinks the tax reforms first introduced in 1994 had envisaged that more tax revenue would be collected in the future. The 1994 reform was designed to increase the financial revenue in order to change the financial situation at that time. According to a report by the State Administration of Taxation (SAT), the actual collection rate is only about 50% because of the inadequate methods.

Experienced tax specialist Guo Wei, who runs his own tax advisory company, says that in the beginning of the 1900s, tax officials used bicycles to visit companies and lacked information, thus tax evasion at that time was very severe.

 Gao explains that the 1 trillion yuan taxation system was set up then with the intention of collecting 500 billion yuan. As the actual rate of collection rose, the total revenue increased. In 2003, the collection rate grew to 70%. Meanwhile the suspension of collecting certain taxes was also ended.

 According to a tax official in Chonqing, the increasing revenue was also due to the double taxation. “Actually we didn’t do anything and the tax revenue went automatically to the national treasury.” He thinks there are too many taxes and some are double taxed, for example on the sale of land and real estate.

 However Sun Gang, a researcher from the Ministry of Finance's taxation research department  offered an alternate explaination for the huge increase in tax revenue. He thinks that in all countries without a single tax system, some taxes can be collected twice. He also said the reform in 1994 was focused on turnover taxes and fits the situation in China. Sun also adds that it’s not reasonable to claim that the reform in 1994 was designed for today’s increases. Guo thinks the legislators at that time were focused more on the problems at contemporary issues.

 How Many More Taxes Will Be “Awakened”?

Jiang Xin, an experienced stock investor believes that he will soon be paying individual income tax on stock transfers after he found himself listed as a self-declared taxpayer with an income over 120,000 yuan. Until now, he has only been paying stamp tax for income on stock trades.

 Jiang’s assumption is logical. The national tax administration has got the information of 2.7 million taxpayers with income of more than 120,000 yuan per year. “ Income on property transaction will become a potential part for personal income tax in the future,” says Guo.

 If the individual income tax on stock transfers was revived, 40 million domestic investors would pay more than the current stamp duty.

 Individual income tax on home rental is also likely to be “revived” with such a significant increase in rents paid in major cities like Beijing.

 In fact, most of the revived idle taxes belong to two categories: first is active areas like real estate transactions, where the government uses tax to balance out huge increases in profits; the second is the demand for more funds to cover rising expenditure, such as the local education surtax and the price regulation fund.

Gao questions whether the level of tax collected today is appropriate, saying that the tax laws made sense in 1994, when the collection rate was only 50%. Sun Gang pointed out that some other taxes may be reduced as these "idle taxes" are gradually revived. However he also added that moves to cancel such taxes are unlikely to go ahead at a time when they're providing such a lucrative revenue stream.


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