China pledges tax reform. That is a big deal for this socialist country.
China pledges tax reform. That is a big deal for this socialist country.
China’s infrastructure is impressive. Hop on a bullet train from Shanghai to central China’s Jiangxi province. The train goes over 180 miles an hour and tickets are affordable.
Five hours and just $76 later, arrive in Ganzhou. The city has a population of nine million people, which by Chinese standards is small. Still, it has a newish six-lane highway.
“They’ve been building highways like crazy here since 2016,” my taxi driver said.
However, local governments are struggling to maintain their slick infrastructure and public services because of the property crisis. At a four-day meeting that wrapped up in Beijing last week, China’s Communist Party pledged tax reforms, including giving local governments the power to collect more tax revenue. That is a big deal.
Even though China calls itself socialist, the country doesn’t collect enough taxes. China’s tax-to-GDP ratio in 2022 was just 14%, compared to its peers at 19% and 23% among wealthy G7 countries, according to the International Monetary Fund.
Instead, local governments in China rely mostly on revenue from land. All urban land is owned by the state. Local authorities lease it to real-estate developers for them to build the sea of high-rises that dot China’s city skylines. For years, Chinese citizens had a deep-seated belief that home prices only went up.
At the peak of the housing boom in 2021, 43% of revenues for local governments came from leasing land, according to China’s ministry of finance.
Then, China’s central government popped the housing bubble and the sector still has not recovered. Investment in real estate infrastructure dropped by 10% in the first half of 2024. Add on three years of quarantine measures and non-stop COVID tests during the pandemic, and local governments are low on money.
At last week’s meeting in Beijing, senior officials resolved to share more tax revenue with local governments and expand sources of tax revenue at the municipal level.
The problem is, not enough people are paying taxes.
Chinese officials keep delaying plans to roll out a nationwide property tax, because it is not popular.
A lot of people also avoid paying individual income taxes. Shanghai’s tax rate ranges from 3% to 45%. Many people, like food vendors at a local night market, get paid in cash, which makes it easier to evade the taxman. Many others do not earn over the threshold of 5,000 yuan per month ($688).
“Very few people in China actually pay individual income tax. The latest figure is about 14% of the [working] population. Very low,” chief economist at Hang Seng Bank China’s Wang Dan said, adding that companies are not much better.
The standard corporate tax rate is 25% though certain enterprises could pay as little as 5%.
“Although the [corporate tax] rate is not that low compared to other emerging markets, most private and micro firms actually can evade tax,” Wang said.
Some employers also avoid paying social insurance contributions in full for workers, which is at least 37% of an employee’s salary.
“For some workers, we will buy social security insurance for them. For others, we won’t provide this,” a factory owner in eastern China told Marketplace. “Our profit margin is too low, if we cover [everyone’s] social security insurance, there will be no profit left.”
However, hard-pressed local governments are keeping a closer eye on firms. In June, news reports said some cities had asked companies to pay taxes dating back years — in one case to 1994. Many private businesses got spooked.
China’s State Administration of Taxation came out to assure companies that these were just routine checks by the local tax authority, but that there is no nationwide campaign to catch tax dodgers going back decades.
For now, the most immediate changes will be on indirect taxes. China has imposed a consumption tax on 15 categories of luxury products including tobacco, alcohol, cosmetics and cars.
That is news to people like cross border e-commerce worker Sam Sun.
“When I buy a 37 yuan ($5) pack of cigarettes, I guess the tax is included, but it’s not shown on the receipt, unlike in the U.S.,” Sun said. “People in China are not that aware about taxes [overall].”
The lack of awareness means very few people even knew restaurants collect a value-added tax. It became a hot news item in June on TikTok’s Chinese sister site Douyin when a diner posted a video complaining that his bill included a 6% VAT charge. He reportedly told a restaurant staffer, “At this kind [pricier] of establishment, shouldn’t you pay the tax? Why should I bear the tax burden?” A restaurant staffer later responded that most restaurants include VAT in their menu prices but theirs did not. Hence the VAT was listed separately on the bill.
As for the consumption tax, it currently goes into the coffers of the central government but soon, more of that money will go to local governments. Also, the tax will shift from being collected by producers to maybe wholesalers or retailers.
Experts say that could result in higher prices for consumers.
“Cigarettes and alcohol are not daily necessities. It is okay if they cost a bit more,” Sun, a regular smoker, said. “Besides, many people in China say that the more cigarettes we buy, the more military aircraft carriers the government will make. So, it’s fine.”
Patriotism aside, salesman Yu Zhihang said it depends how much prices increase. He started smoking two years ago, after his food business went bust.
“If the price increase is like [under a dollar], then I won’t change my habits, but then again I might smoke less,” Yu said.
Already, tobacco and alcohol seller Mr Zhou said he’s struggling.
“The business this year is terrible. It’s at least 30 to 40% less than last year and the year before that,” he said.
Taxes likely will not be imposed on more goods while consumption is still weak.
Additional research by Charles Zhang.
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