China’s new individual income tax law introduces great changes
By Bai Jingming |
chinawatch.cn |
Updated: 2019-01-29 15:27
The amended individual income tax law that came into effect on Jan 1 will cut tax by hundreds of billions of yuan. The policy slashed individual income taxes for a wide range of domestic taxpayers and resolved people’s concerns in a targeted manner.
It also allowed the individual income tax system to further support relevant social policies in fields such as education and elderly care.
With this caveats, the new tax cut policy marks a great breakthrough in institutional reform in this regard, and is expected to inject new impetus into China's economy.
The reform on the tax policy is highlighted in three aspects. First, the deduction quota of personal income has been lifted to 60,000 yuan ($8,815) per year.
Currently domestic individual income taxpayers are urban employees, whose average annual salary is around 80,000 yuan. Among them, the staff of small- and medium-sized enterprises (SMEs) accounts for more than 60 percent, and their average yearly income is around 60,000 yuan. After the tax deduction was launched, therefore, most employees of SMEs have been freed from taxation of their personal income.
Furthermore, special deductions for social insurance payers has also been introduced to the tax system. Considering the current average taxpayer cost, those with an annual income of 80,000 yuan (average salary of urban employees) are excluded from tax payments. In contrast, in most developed economies, employees with salaries between the minimum-wage level and the average level need pay tax for individual income.
In addition, the raised deduction quota is 2.5 times the amount of the per capita consumption expenditure of urban residents. The figure in many developed economies is less than 1.5. From this perspective, the base of individual income tax in China is among the lowest in the world.
Second, many taxpayers apply to lower rates after the reform. Those with a monthly income of 10,000 yuan to 40,000 yuan enjoy large tax cuts, among which, those earning 20,000 yuan to 30,000 yuan per month benefit the most.
China is focusing on expanding the middle-income group as one of the main targets of its income distribution reform. The group with rising purchasing power and upgrading consumption choices is a driving force to boosting the domestic economy, contributing to the improvement of consumer spending on automobiles, real estate and tourism. As China pursues high-quality growth amid economic slowdown, the medium- and high-income group is expected to play a more effective role in ensuring stable growth, hence the launch of the reform to stimulate consumption of the middle class.
Last but not lease, the reform has introduced special deductions covering expenditures in six areas: children's education, continuing education, health treatment for serious diseases, housing loan interest, rent and elderly care.
In response to strong public demands, the dimension of household income taxation has been introduced to the new tax law, helping reduce the burden of families. For example, the treatment expense caused by serious diseases generally falls on families instead of individuals. According to the principle of targeted deduction, patients can also enjoy deductions through their spouses that may otherwise increase the burden on their families.
Moreover, the new policy can help ensure basic expenditures of domestic residents, as the special deductions are closely related to people's livelihood. The expenditures for children's education, housing loan interest, rent and elderly care are regular, while that of health treatment for serious diseases can cripple household income and savings and even result in high debts. Therefore it’s important to ensure that adequate income is always available for patients. By providing cushions for people's livelihoods, special deductions are enhancing individual and family wellbeing.
The new tax policy is able to help solve major, long-term social problems. Since China is aging and the phenomenon will speed up over the next decade, pension expenses will be swelling which makes it an inevitable choice to improve self-funded pensions. Given this, deducting people’s expenditures for elderly care is a forward-looking measure that can ease the burden of pension in the country’s aging society.
Overall, the reform on individual income tax system can ensure national fiscal revenue, optimize income distribution and contribute to social development in the long term. As the individual incomes increase and market-oriented reforms go further, the tool of the individual income tax will be playing an even bigger role in social adjustment.
The author is vice-president of the Chinese Academy of Fiscal Sciences. The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.
All rights reserved. Copying or sharing of any content for other than personal use is prohibited without prior written permission.
The amended individual income tax law that came into effect on Jan 1 will cut tax by hundreds of billions of yuan. The policy slashed individual income taxes for a wide range of domestic taxpayers and resolved people’s concerns in a targeted manner.
It also allowed the individual income tax system to further support relevant social policies in fields such as education and elderly care.
With this caveats, the new tax cut policy marks a great breakthrough in institutional reform in this regard, and is expected to inject new impetus into China's economy.
The reform on the tax policy is highlighted in three aspects. First, the deduction quota of personal income has been lifted to 60,000 yuan ($8,815) per year.
Currently domestic individual income taxpayers are urban employees, whose average annual salary is around 80,000 yuan. Among them, the staff of small- and medium-sized enterprises (SMEs) accounts for more than 60 percent, and their average yearly income is around 60,000 yuan. After the tax deduction was launched, therefore, most employees of SMEs have been freed from taxation of their personal income.
Furthermore, special deductions for social insurance payers has also been introduced to the tax system. Considering the current average taxpayer cost, those with an annual income of 80,000 yuan (average salary of urban employees) are excluded from tax payments. In contrast, in most developed economies, employees with salaries between the minimum-wage level and the average level need pay tax for individual income.
In addition, the raised deduction quota is 2.5 times the amount of the per capita consumption expenditure of urban residents. The figure in many developed economies is less than 1.5. From this perspective, the base of individual income tax in China is among the lowest in the world.
Second, many taxpayers apply to lower rates after the reform. Those with a monthly income of 10,000 yuan to 40,000 yuan enjoy large tax cuts, among which, those earning 20,000 yuan to 30,000 yuan per month benefit the most.
China is focusing on expanding the middle-income group as one of the main targets of its income distribution reform. The group with rising purchasing power and upgrading consumption choices is a driving force to boosting the domestic economy, contributing to the improvement of consumer spending on automobiles, real estate and tourism. As China pursues high-quality growth amid economic slowdown, the medium- and high-income group is expected to play a more effective role in ensuring stable growth, hence the launch of the reform to stimulate consumption of the middle class.
Last but not lease, the reform has introduced special deductions covering expenditures in six areas: children's education, continuing education, health treatment for serious diseases, housing loan interest, rent and elderly care.
In response to strong public demands, the dimension of household income taxation has been introduced to the new tax law, helping reduce the burden of families. For example, the treatment expense caused by serious diseases generally falls on families instead of individuals. According to the principle of targeted deduction, patients can also enjoy deductions through their spouses that may otherwise increase the burden on their families.
Moreover, the new policy can help ensure basic expenditures of domestic residents, as the special deductions are closely related to people's livelihood. The expenditures for children's education, housing loan interest, rent and elderly care are regular, while that of health treatment for serious diseases can cripple household income and savings and even result in high debts. Therefore it’s important to ensure that adequate income is always available for patients. By providing cushions for people's livelihoods, special deductions are enhancing individual and family wellbeing.
The new tax policy is able to help solve major, long-term social problems. Since China is aging and the phenomenon will speed up over the next decade, pension expenses will be swelling which makes it an inevitable choice to improve self-funded pensions. Given this, deducting people’s expenditures for elderly care is a forward-looking measure that can ease the burden of pension in the country’s aging society.
Overall, the reform on individual income tax system can ensure national fiscal revenue, optimize income distribution and contribute to social development in the long term. As the individual incomes increase and market-oriented reforms go further, the tool of the individual income tax will be playing an even bigger role in social adjustment.
The author is vice-president of the Chinese Academy of Fiscal Sciences. The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.
All rights reserved. Copying or sharing of any content for other than personal use is prohibited without prior written permission.
