Decoding China's individual income tax reform

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‍Editor's note: Weng Wuyao is the director of the Institute for Research of Fiscal (Tax) and Financial Laws at China University of Political Science and Law (CUPL). The article reflects the author's opinion, and not necessarily the views of CGTN.

It has been over two months since the new Chinese individual income tax law took effect on January 1. The regulation is a key topic on the agenda of the Two Sessions, currently underway in the Chinese capital.

China has made "sweeping changes" to its individual tax law including raising the tax threshold and introducing deductions across six categories of expenses.

While delivering the annual government work report on Tuesday, Chinese Premier Li Keqiang stressed that the new law will be well implemented.

Why now?

Individual income tax reform is the result of putting into effect a series of related goals defined by the Chinese authorities in the last five years. Some necessary conditions and realistic premises have been satisfied.

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For example, firstly, the taxation is no longer seen solely as an instrument of economic reform, but an important instrument of state governance to promote social equity, considering that the 3rd Plenary Session of the 18th CPC Central Committee has confirmed that finance is the foundation and an important pillar of state governance.

Second, with the rapid increase in taxes and cost burdens on ordinary people and the continuous growth of gap between rich and poor, the social demand for easing such burdens and realizing substantial equity has become more urgent.

Third, with the use of big data in taxation and the advent of tax administration informatization, the capability of tax institutions to manage and collect taxes has been substantially enhanced.

Why put forward additional tax deductions?

First of all, the introduction of additional tax deductions has taken into consideration the basic needs of people, covering expenses in areas like education, medical treatment, house rent, among others. Therefore, such move guarantees people's livelihood and aims at bettering the life of Chinese people.

Second, the introduction of additional tax deductions has considered equity in taxation, characterized by differential and individualized taxation. Not all taxpayers will benefit from the additional tax deductions, only those who have children to send to school, old people to support, serious illnesses to cure, and housing loan interests or housing rents to pay.

Besides, the amount of deductible expenses varies among different taxpayers due to their different situations.

Lastly, the convenient implementation of additional tax deductions for both tax authorities and taxpayers is considered. In other words, the increased costs for the tax authorities to carry out the tax audits in respect to the taxpayers' application of deduction should be limited to a reasonable extent.

For this consideration, for example, the six additional tax deductions adopted the model of the fixed amount of deductible expenses.

What effects will it have?

On the one hand, due to the tax reduction measures such as raising the tax threshold, lowering expenses will obviously raise people's income level, in particular, that of low and middle-income groups.

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Furthermore, this reform will raise people's consumption levels, improve their living standards and promote to a certain extent the development of related businesses or industries, like the education sector and real state industry.

It is noteworthy that with the law drawing people's attention and more people participating in activities related to taxation, this increased awareness will create a positive and significant effect on the construction of a tax state for China.

On the other hand, this reform will strengthen the individual tax administration, by adopting several new measures including anti-avoidance clauses and rules on obligations of third parties to provide taxpayers' tax information to tax authorities.

(If you want to contribute and have specific expertise, please contact us opinions@cgtn.com.)