According to the “Report on the Implementation of Central and Local Budgets for 2011 and on Draft Central and Local Budgets for 2012” presented to the National People’s Congress on March 5, China’s key tax reforms in 2012 will focus on six specific types of taxes, namely:
- Property tax (PT)
- Value-added tax (VAT)
- Resource tax (RT)
- Excise tax (ET)
- Environmental protection tax (EPT)
- Urban maintenance and construction tax (UMCT).
PT: Possible expansion to more cities
In a move to curb any housing bubble and restrict speculative buying, China begun a pilot PT reform on second home purchases in the municipalities of Shanghai and Chongqing early last year. This year, in addition to advancing such experiments on buying homes, China will also study and design a plan for reforming taxes on owning and selling real estate.
During a discussion session with representatives from Qinghai Province on March 4, the Chinese Finance Minister Xie Xuren said China is currently studying on the possibility of expanding the PT imposition to more cities. However, it remains unclear what the next city will be.
Jia Kang, director of the Ministry of Finance’s Fiscal Science Research Institute (FSRI), points out that the existing PT regime still lacks maturity. The reforms in pilot cities require intensive study before being expanded to other cities.
VAT: Optimizing tax revenue distribution
Starting on January 1, 2012, China commenced implementing a pilot VAT reform – which aims to substitute business tax (BT) imposition with VAT – in the transport and other six modern service sectors in Shanghai. Beijing has also recently obtained government approval to start a similar program in July.
According to the 2012 budget, China will continue conducting the VAT reform and improving its VAT system. The advancement in the experiments of replacing BT with VAT is the foremost issue during China’s fiscal system reform process, said Liu Shangxi, deputy director of the FSRI.
Liu also pointed out that the existing tax revenue distribution system between the central and local governments may be adjusted, following the enlarged scope of VAT imposition. Currently, 75 percent of domestic VAT revenue goes to the central government, and the other 25 percent is distributed to local governments.
RT: Potentially impacting more resources
In an effort to promote resource conservation and environmental protection, China amended its RT law last year to calculate RT on crude oil and natural gas based on their prices instead of their production volume. Foreign-invested onshore and offshore oil and gas fields are also required to follow the new provisions.
The Chinese government may expand its ongoing RT reform to include more types of resources.
Liu Kegu, consultant at China Development Bank, advises that China should employ the new RT calculation method on resources in the following order: oil and natural gas, coal, metal ores, non-metallic ores and water resources.
ET: Promoting the industrial adjustment function
China charges ET on a variety of products. According to the “Interim Provisions on ET (State Council Decree No.539),” those products mainly include cigarettes, liquor, cosmetics, high-end jewelry, firecrackers / firework, refined oil, tires, motorcycles, cars, golfing equipment, high-end watches, yachts, wooden disposable chopsticks and solid wood flooring.
ET imposition often has an impact on the prices of consumer goods and can even affect an entire industry. The ET system improvement in the future will mainly serve the purposes of energy conservation, emissions reductions and rational consumption.
A recent example illustrating ET’s industrial adjustment function is China’s announcement last year that pure biodiesel made from waste animal and plant oils is ET free, if meeting certain criteria. The new policy – which aims to encourage oil processors to make legal and economic use of waste oil – is hoped to promote both efficient energy use and food safety in China.
EPT: Imposition may start in 2013
In pursuit of the goal to improve resource conservation and environmental protection, the China Petroleum and Chemical Industry Association has submitted an EPT proposal to the State Council in January, according to a Reuters report. EPT may be charged on carbon emissions and sewage disposal.
Jiang Kejun, an official at the National Development and Reform Commission, speculates that EPT collection may begin in 2013.
However, there will be much work to do before introducing EPT, says Bai Jingming, deputy director of the FSRI. It is important to resolve the possible conflicts between the new EPT and the existing environment-related fees, such as sewage fees as well as mineral development and protection fees. It is also vital to find a balance between the EPT reform and other ongoing tax reforms, including the experiments on RT and VAT.
UMCT: A new reform brought to the fore
UMCT is an additional charge based on product taxes, VAT and BT. Starting in December 2010, foreign-invested enterprises are also required to pay UMCT, together with the local education surcharge.
The 2012 budget gave a brief mention to the UMCT reforms, officially bringing the government plan to the public eye for the first time.
Ai Hongde, secretary-general at Dongbei University of Finance and Economics’ China Communist Party Committee, says the main goal of the UMCT reform is to change the characteristics of UMCT from being an additional charge into an independent tax. In the future, UMCT may be calculated directly based on taxpayers’ sales or business turnover.