China plans personal income tax reform, raises tax threshold from 3500 to 5000 yuan per month

In an attempt to stimulate consumer spending, China is carrying out its first major tax reform in the last seven years. The country plans to raise the minimum threshold for personal income tax.

An amendment draft for the Individual Income Tax Law was submitted in front of the Standing Committee of China’s National People’s Congress (NPC) whose bimonthly session began on Tuesday.

The draft amendment raises the minimum threshold for personal income tax from 3,500 yuan (Rs 35000) per month to 5,000 yuan (Rs 53000). Annually, the figure has been raised from 42000 yuan (Rs 4.45 lakh) to 60000 yuan (Rs 6.36 lakh). The exemption limit in India, by comparison, stands at Rs 2.5 lakh annually. However, unlike India, Chinese taxpayers can claim very few deductibles.

The new draft addresses this anomaly, and for the first time allows deductions for spending on children’s education, medical fees for critical illness and interest paid for home loans.

Personal income tax in China ranges from three per cent for monthly taxable incomes of RMB 1,500 per month (Rs 16000) to 45 per cent for taxable incomes greater than RMB 80,000 (Rs 8.45 lakh) per month.

“The revisions focus on content that is no longer suitable for China’s continuing reform,” Finance Minister Liu Kun told lawmakers at Tuesday’s opening of the session. He added that the changes have taken people’s rising consumption expenses into account.

He also said that the changes are conducive to reducing tax burdens for taxpayers, raising people’s income and boosting consumption.

The South China Morning Post had stated that the retail sales in China for May this year had been the lowest in the last 15 years while the government’s revenue from personal income tax in the first five months of the year rose 20.6 per cent from the equivalent period of 2017.

China’s total tax revenue in 2017 rose 10.7 per cent from a year earlier to 14.4 trillion yuan, its first double-digit increase in five years, according to figures from the Ministry of Finance. Of the total, revenue from personal income tax surged 18.6 per cent to 1.2 trillion yuan, it said. Individual income tax was the third major contributor to China’s total tax revenue, following value-added tax and enterprise income tax.

Over the years, there has been increasing demands to lighten the tax burden on Chinese citizens. Under the present global economic situation and China’s trade tussle with the US, the move is seen as a sign to provide shelter Chinese economy by stimulating spending.

Once this approval is cleared, it will be the first time that tax laws would have been reviewed in the last seven years.

The current law has undergone seven revisions since it was enacted in 1980 when the original threshold for individual income tax exemption was 800 yuan per month. It was raised to 1,600 yuan in 2005 and 2,000 yuan in 2007. The current threshold is 3,500 yuan according to the revision made in 2011.
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