Taxation reform - unifying national and local systems#China Newsweek#-Sino-US


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Taxation reform - unifying national and local systems

A draft amendment to the country’s Individual Income Tax Law has been circulated for public comments recently, which has attracted wide attention as it is directly related to the interests of most people.

The income tax accounts for a small part in the country’s tax system. And now, China is taking a more important step for the tax system - integrating national and local taxation systems.

In the 24th issue of 2018, the China Newsweek magazine ran a cover story on the background of the taxation reform, and the concerns relating to the integration of the national and local systems.

Below is an excerpt of the article.

After a flag-raising ceremony, the new Zhejiang provincial bureau of the State Administration of Taxation was formally established on June 15, marking the integration of the former national and local taxation systems in Zhejiang.

The personnel of the bureau were reshuffled before the ceremony, and the staff started to work together, aiming to fulfil the goal of handling all tax affairs at one place.

What happened in the Zheijiang taxation system is happening across the country. On June 15, all provinces, regions and municipalities held the ceremonies for new tax bureaus.

Chinese Vice Premier Han Zheng has stressed the need for taxation reform and to better manage tax collection, calling for firm and orderly progress in the implementation of the reform measures at a recent meeting.

China will reform national and local taxation systems by integrating their offices at and below the provincial level. New tax bureaus at city and county levels will be established around July 20.

It will be the third important change in the country’s taxation system after the change from profit submission to tax payment in 1980s and the introduction of tax-sharing between central and local governments in 1994.

The integration has attracted public attention to the reform’s impact on the local debt, and the division of general administrative power and financial power between central and local governments, as the country’s reform and opening completes 40 years.

Reasons for division

Almost every change in the country’s taxation system is linked to a tussle between the central and local governments for more financial power, experts familiar with the country’s taxation system said.

Peng Sen, the former vice director of the National Development and Reform Commission (NDRC), the country's top economic planner, has offered proposals on tax reform many times in recent years.

He said that the country should facilitate the division of the routine power and financial power between the central and local governments, especially the urgent reform of the transfer payment system.

In the 1980s and early 1990s, the central government allowed local governments to be in charge of tax collection and hand over part of local revenue that exceeded a limit to the central government.

This measure played a positive role in stimulating enterprises and local governments, but it left the central government with little knowledge of the tax collection situation and insufficient financial resources.

The central government’s tight financial situation reached a peak in 1993. Official data showed that the central fiscal revenue accounted for 22 percent of the country’s total fiscal revenue in 1993, down from 39.68 percent in 1985.

Peng recalled that in 1993, the total fiscal revenue across the country reached more than 400 billion yuan, but the central government only had less than 100 billion yuan.

A change was needed. The tax-sharing system came in 1994. China’s tax revenue comes mainly from indirect taxes, including value-added tax, business tax and consumption tax, contributing 70 to 80 percent of the revenue before 1994. The value-added tax contributed 50 percent to the total revenue.

According to the tax-sharing policy, the central government would take all of the consumption tax and 75 percent of the VAT revenue, and local governments take business tax and 25 percent of the VAT revenue.

“This system definitely defines the regular income for central government and local governments and their shared income,” said Shi Zhengwen, a professor of fiscal and tax law at China University of Political Science and Law.

“It ensures the central government’s efficiency in tax collection, and also improves local government’s motivation for local tax collection,” Shi said.

Shift to integration

After entering the new century, the State Administration of Taxation had to enhance its guidance on central and local tax affairs due to the needs of the new economic development and macro regulation.

The new economic environment has raised higher requirements on tax authorities' procedures and efficiency, and the tax-sharing system had its bottlenecks and could not meet the demands.

Jia Shaohua, director of tax research institute under Central University of Finance and Economics, said that the tax-sharing system has three major problems now: unclear jurisdiction, unreasonable distribution and duplication of organs.

Official data showed that local governments’ fiscal situation dropped from 102 percent in 1993 to 61 percent in 2006, and 556 cities and counties suffered deficits in 2005. To meet local fiscal budgets, some local governments started to collect excessive taxes.

The scope of shared taxes, such as VAT and income tax, has been enlarged in recent years, and the central government’s share has increased in the process of the change from business tax to VAT.

Following the reform of the tax system and development of computing technology, new solutions appeared to solve low efficiency and high cost in the tax collection, said Xiong Wei, a professor from Wuhan University.

Shi Zhengwen said that after the integration, the tax bureaus will be under direct governance of the State Administration of Taxation and will also need the cooperation from local governments.

Zhang Bin, a research fellow with the National Academy of Economic Strategy of CASS, said that this round of reform will include three major aspects: merging central and local taxation systems; adjusting taxation scopes and optimizing the organization and duties at different levels.

Further reforms

On October 13, 2015, the Central Leading Group for Deepening Overall Reform passed the reform plan on the central and local taxation systems, aiming to solve the outstanding problems, such as the unclear responsibilities.

In December that year, the central authorities published the reform plan, pointing out the problems such as inconvenience of handling tax affairs, inadequate organization and management.

Starting from May 1, 2016, the business tax changed to VAT, which became a direct reason behind the integration of the central and local taxation systems.

Business tax is the largest local tax, contributing 33 percent of the local government’s tax revenue, but the VAT is a shared tax, and after the change, the central government will take over the taxation of service companies.

Fan Ziying, professor from the Shanghai University of Finance and Economics, said that after the integration, the local fiscal income will not be influenced dramatically, and the developed places might see an increase in income.

But a direct influence is that local governments would find it difficult to make plans for income, and they could only make detailed plans for spending, Fan said.

This reform will actually weaken local financial power, Fan said. “Through the reform, the central government expects to achieve transparency in the income sources of local governments, and ensure that taxation is not influenced by local governments.”

In the past, the local governments might offer preferential tax policies to attract companies to boost local development, but after the integration, the local governments would not have such power in taxation.

Under a fixed tax system, companies would have to pay taxes according to law, and the enhanced taxation process after the integration will reduce the tax evasion cases, Zhang Bin said. It is also the goal of the integration.

While the tax collection rate might increase after the integration, the tax rates might decline in the future, which will help companies, Zhang said, as it is unfair that large companies pay taxes according to the law and small companies evade taxes as is the case now.

Official data showed that currently, there are 460,000 workers in the central taxation system and 410,000 workers in the local taxation system, and after the integration, the question is how to rearrange the staff.

Fan Ziying said that it would take a long time to streamline the new taxation system, and the first group to be possibly downsized will be 120,000 contracted workers in the system.

There are some other measures, such as reducing recruitment and encouraging retirement, to reduce the size, Fan said.

Zhang said that the integration will not only see the merger of personnel and offices, but the taxation system should learn from former experiences to optimize the interior departments, and define duties.
 


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