- Tax system in China
Taxes provide the most important revenue source for the Government of the People's Republic of China. As the most important source of fiscal revenue, tax is a key economic player of macro-economic regulation, and greatly affects China's economic and social development. With the changes made since the 1994 tax reform, China has preliminarily set up a streamlined tax system geared to the socialist market economy.
China's tax revenue exceeded 4.94 trillion yuan (670 billion U.S. dollars) in 2007, up 31.4 percent on 2006. This was the highest increase of any year since reforms began in 1978. [http://news.xinhuanet.com/english/2008-01/01/content_7348736.htm]
Types of taxes
Under the current tax system in China, there are 26 types of taxes, which, according to their nature and function, can be divided into the following 8 categories:
turnover taxes. It includes three kinds of taxes, namely, Value-Added Tax, Consumption Taxand Business Tax. The levy of these taxes are normally based on the volume of turnover or sales of the taxpayers in the manufacturing, circulation or service sectors.
income taxes. It includes Enterprise Income Tax(applicable to such domestic enterprises as state-owned enterprises, collectively-owned enterprises, private enterprises, joint operation enterprises and joint equity enterprises), Income Tax on Enterprises with Foreign Investment and Foreign Enterprises, and Individual Income Tax. These taxes are levied on the basis of the profits gained by producers or dealers, or the income earned by individuals.
*Category of resource taxes. It consists of
Resource Taxand Urban and Township Land Use Tax. These taxes are applicable to the exploiters engaged in natural resource exploitation or to the users of urban and township land. These taxes reflect the chargeable use of state-owned natural resources, and aim to adjust the different profits derived by taxpayers who have access to different availability of natural resources.
*Category of taxes for special purposes. These taxes are
City Maintenance and Construction Tax, Farmland Occupation Tax, Fixed Asset Investment Orientation Regulation Tax, Land Appreciation Tax, and Vehicle Acquisition Tax. These taxes are levied on specific items for special regulative purposes.
property taxes. It encompasses House Property Tax, Urban Real Estate Tax, and Inheritance Tax(not yet levied).
*Category of behaviour taxes. It includes
Vehicle and Vessel Usage Tax, Vehicle and Vessel Usage License Plate Tax, Stamp Tax, Deed Tax, Securities Exchange Tax(not yet levied), Slaughter Taxand Banquet Tax. These taxes are levied on specified behaviour.
agriculturaltaxes. The taxes belonging to this category are Agriculture Tax(including Agricultural Specialty Tax) and Animal Husbandry Taxwhich are levied on the enterprises, units and/or individuals receiving income from agriculture and animal husbandry activities.
customs duties. Customs duties are imposed on the goods and articles imported into and exported out of the territory of the People's Republic of China, including Excise Tax.
State organs that have the authority to formulate tax laws or tax policy include the
National People's Congressand its Standing Committee, the State Council, the Ministry of Finance, the State Administration of Taxation, the Tariff and Classification Committee of the State Council, and the General Administration of Customs.
Tax laws are enacted by the National People's Congress, e.g., the Individual Income Tax Law of the People's Republic of China; or enacted by the Standing Committee of the National People's Congress, e.g., the Tax Collection and Administration Law of the People's Republic of China.
The administrative regulations and rules concerning taxation are formulated by the State Council, e.g., the Detailed Rules for the Implementation of the Tax Collection and Administration Law of the People' s Republic of China, the Detailed Regulations for the Implementation of the Individual Income Tax Law of the People's Republic of China, the Provisional Regulations of the People's Republic of China on Value Added Tax.
The departmental rules concerning taxation are formulated by the Ministry of Finance, the State Administration of Taxation, the Tariff and Classification Committee of the State Council, and the General Administration of Customs, e.g., the Detailed Rules for the Implementation of the Provisional Regulations of the People's Republic of China on Value Added Tax, the Provisional Measures for Voluntary Reporting of the Individual Income Tax.
The formulation of tax laws follow four steps: drafting, examination, voting and promulgation. The four steps for the formulation of tax administrative regulations and rules are: planning, drafting, verification and promulgation. The four steps mentioned above take place in accordance with laws, regulations and rules.
Besides, the laws of China stipulates that within the framework of the national tax laws and regulations, some local tax regulations and rules may be formulated by the People's Congress at the provincial level and its Standing Committee, the People's Congress of minority nationality autonomous prefectures and the People's Government at provincial level.
The following table summarises up the current tax laws, regulations and rules and relevant legislation in China.
Current Tax Legislation Table
(3) Computation of tax payable
The computation of Consumption Tax payable shall follow either the ad valorem principle or quantity-based principle. Generally, the producers of taxable consumer goods are the taxpayers and the Consumption Tax shall be paid on sales of the goods by the producers. The computing formula is:
a. Tax payable = sales amount of taxable consumer goods × Applicable tax rate , orb. Tax payable = sales volume of taxable consumer goods × Tax amount per unit
Imported taxable consumer goods to which Ad valorem method is applied in computing the tax payable shall be assessed according to the composite assessable price and the applicable rate.
Taxpayers of Business Tax include all enterprises, units, household businesses and other individuals engaged in provision of taxable services, transfer of intangible assets or in sales of immovable properties within the territory of the People's Republic of China.
(2) Taxable items and tax rates
Table of Business Tax Taxable Items and Rates:
The formula for computing the tax payable is:
Annual taxable income = Gross annual income of production /business - Costs, expenses and lossesTax payable for the year =Annual taxable income ×Applicable tax rate - Quick deduction
c. Income from contracted or leased operation of enterprises or institutions The income from contracted or leased operation of enterprises or institutions is taxed on the basis of the balance of the gross annual income after deduction of the necessary expenses (currently 800 yuan per month) and by applying the suitable tax rate in Individual Income Tax Rates Schedule(2) above.
d. Remuneration for personal service, author' s remuneration, royalties, income from lease of property
The income of remuneration for personal service, author's remuneration, royalties and income from lease of property are taxed on the basis of remaining sum of the income after deduction of 800 yuan when each payment of the income is not over 4,000 yuan or on the basis of the remaining sum of the income after deduction of 20% of the income as the expenses when each payment of the income is over 4,000 yuan and by applying the rate of 20%. The formula for that is:
Taxable income= Cross value of taxable items - 800 yuan (or 20% of gross value of taxable items)Amount of tax payable = Taxable income × 20%
e. Income from transfer of property
The tax base is the balance of the proceedings derived from transfer of property after deducting the original value of the property and the reasonable expenses The applicable rate is 20%. The formula for computing the amount of tax payable is:
Taxable income = Proceedings from transfer of property - Original value of property - Reasonable expensesAmount of tax payable = Taxable income × 20%
f. Interests, dividends, bonuses and contingent income
The tax on interest, dividends, bonuses, contingent income and other income is based on each receipt of the income with the rate of 20%. The formula for computing the income tax payable is:
Tax payable = The full amount in each receipt ×20%
(3) Main tax exemptions
The following income are exempt from income tax:
a. Awards for achievements in science, education, technology, culture, public health, physical culture and environmental protection granted by the Provincial People' s Governments, Ministries and Commissions under the State Council, China's People's Liberation Army Units at army level and above and by foreign and international organizations;
b. Interest income on saving deposits, interest income on National Bonds issued by the Ministry of Finance and interest income on financial bonds issued upon approval by the State Council;
c. Special governmental allowances provided in accordance with the uniform regulations of the State Council and the subsidies and allowances stipulated as being exempt by the State Council;
d. Welfare benefits, survivor's pensions and relief payments;
e. Insurance indemnities;
f. Military severance payment and demobilisation payment received by members of the armed forces;
g. Settlement payment, severance payment and retirement payment received by public servants and workers under the uniform provisions of the State;
h. Medical insurance pension and the basic retirement pension saved and withdrawn according to relevant rules;
i. Income derived by diplomatic agents and consular officers and other personnel who are exempt from tax under the provisions of the relevant Laws of the People's Republic of China;
j. Income exempt from tax as stipulated in the international conventions to which Chinese Government is a party and in the agreements it has entered into.
The taxpayers of Resource Tax include all units and individuals engaged in the exploitation of mineral resources or production of salt prescribed in the Resource Tax Regulations within the territory "of the People' s Republic of China.
(2) Taxable items and tax rates
Table of Resource Tax Taxable Items and Tax Amount per Unit:
(3) Computation of tax payable
To calculate the amount of Land Appreciation Tax payable, the first step is to arrive at the appreciation amount derived by the taxpayer from the transfer of real estate, which equals to the balance of proceeds received by the taxpayer on the transfer of real estate after deducting the sum of relevant deductible items. Then the amount of tax payable shall be calculated respectively for different parts of the appreciation by applying the applicable tax rates in line with the percentages of the appreciation amount over the sum of the deductible items. The sum of the amount of tax payable for different parts of the appreciation shall be the full amount of tax payable by the taxpayers. The formula is:
Tax payable = Σ (Part of appreciation ×Applicable rate)
(4) Major exemptions
The Land Appreciation Tax shall be exempt in situations where the appreciation amount on the sale of ordinary standard residential buildings construction by taxpayers for sale does not exceed 20% of the sum of deductible items and when the real estate is taken over or repossessed in accordance to the laws due to the construction requirements of the State.
House Property Tax
House Property Tax is levied in cities, county capitals, townships and industrial and mining districts. Taxpayers are owners of house property, operational and managerial units of house property, mortgagees, custodians and users of house property (excluding enterprises with foreign investment, foreign enterprises and foreigners).
(2) Tax base, tax rates and computation of tax payable
Two different rates are applied to two different cases: in one case where the tax base is the residual value after the subtraction of 10% to 30% of the original value from the original value of the property, the tax rate is 1.2% ; in the other case where the tax base is the rental income from the property, the rate is 12%. The formula for calculating House Property Tax payable is:
Tax payable =Tax base ×Applicable rate
(3) Major exemptions
House Property Tax may be exempt on the house property for the own use of State organs, people' s organizations and the armed forces; the house property for the own use of institutions whose operating funds are allocated by State finance departments; the house property for the own use of religious temples and shrines, parks and places of historic interest and scenic beauty; the house property owned by individuals for non-business use; and the damaged houses and perilous houses verified as being out of use by relevant department.
Urban Real Estate Tax
At present, this tax is only applied to enterprises with foreign investment, foreign enterprises and foreigners, and levied on house property only.
Taxpayers are owners, mortgagees custodians and/or users of house property.
(2) Tax base, tax rates and computation of tax payable
Two different rates are applied to two different bases: one rate of 1. 2% is applied to the value of house property, and the other rate of 18% is applied to the rental income from the property. The formula for calculating House Property Tax payable is:
Tax payable = Tax base ×Applicable rate
(3) Major exemptions and reductions
Newly constructed buildings shall be exempt from the tax for three years commencing from the month in which the construction is completed. Renovated buildings for which the renovation expenses exceed one half of the expenses of the new construction of such buildings shall be exempt from the tax for two years commencing from the month in which the renovation is completed. Other house property may be granted tax exemption or reduction for special reasons by the People's Government at provincial level or above.
Vehicle and Vessel Usage Tax
Taxpayers include enterprises, units, individual household businesses and other individuals who possess and operate vehicles and/or vessels within the territory of the People's Republic of China (excluding enterprises with foreign investment, foreign enterprises and foreigners).
(2) Tax base, tax amount per unit and computation of tax payable
The tax base are classified into two categories respectively for vehicles and vessels: the tax base for vehicles is the number of the taxable vehicles or the net-tonnage of the taxable vehicles; the tax base for vessels is the net-tonnage or the deadweight tonnage of the taxable vessels.
The annual amount of tax payable is separately computed for vehicles and vessels:
a. For vehicles: 60 to 320 yuan per passenger vehicles; 16 to 60 yuan per ton ( net-tonnage ) for cargo vehicles; 20 to 80 yuan per motorcycle; 1.2 to 32 yuan per non-motorized vehicle.
b. For vessels: 1.2 to 5 yuan per net tonnage for motorized vessels; 0.6 to1.4 yuan per deadweight tonnage for non-motorized vessels.
The formula for calculating tax payable is:
(a) Tax payable = Number (or net-tonnage ) of taxable vehicles × Applicable tax amount per unit
(b) Tax payable = Net-tonnage (or deadweight capacity) of the taxable vessels × Applicable tax amount per unit
(4) Major exemptions
Tax may be exempt on the vehicles and vessels self-used by governmental organs, people's organizations and military units; the vehicles and vessels self-used by units financed by financial fund allocation; the fishing vessels with a deadweight capacity not in excess of one ton; the pontoons and floating docks used exclusively for passengers, the loading or unloading of cargo and the storage of goods; the vehicles and vessels used by police department, fire department, health department and environmental department; the vessels subject to payment of Vessel Tonnage Tax according to Rules; special vehicles designed for the convenience of the handicapped; and the tractors used mainly in agriculture production.
Vehicle and Vessel Usage License Plate Tax
At this moment, this tax is only applied to the enterprises with foreign investment, foreign enterprises, and foreigners. The users of the taxable vehicles and vessels are taxpayers of this tax.
(2) Tax amount per unit
The tax amount per unit is different for vehicles and vessels:
a. Tax amount per unit for vehicles: 15-80 yuan per passenger vehicle per quarter; 4-15 yuan per net tonnage per quarter for cargo vehicles; 5-20 yuan per motorcycle per quarter. 0.3-8 yuan per non-motored vehicle per quarter.
b. Tax amount per unit for vessels: 0.3- 1.1 yuan per net tonnage per quarter for motorized vessels; 0.15-0.35 yuan per non-motorized vessel.
The tax base for vehicles is the quantity or the net tonnage of taxable vehicles The tax base for vessels is the net-tonnage or the deadweight tonnage of the taxable vessels. The formula for computing the tax payable is:
a. Tax payable = Quantity (or net-tonnage ) of taxable vehicles × Applicable tax amount per unitb. Tax payable = Net-tonnage (or deadweight tonnage) of taxable vessels × Applicable tax amount per unit
a. Tax exemptions may be given on the vehicles used by Embassies and Consulates in China; the vehicles used by diplomatic representatives, consuls, administrative and technical staffs and their spouses and non-grown-up children living together with them.
b. Tax exemptions may be given as stipulated in some provinces and municipalities on the fire vehicles, ambulances, water sprinkling vehicles and similar vehicles of enterprises with foreign investment and foreign enterprises.
The taxpayers of Stamp Tax include any enterprise, unit, individual household business operators and other individual who executes or receives specified economic documents within the territory of China.
(2) Taxable items and tax rates
Table of Stamp Tax Taxable Items and Rates:
State Administration of Taxation
General Administration of Customs
*Ministry of Finance
Tariff and Classification Committee of the State Council
List of Chinese administrative divisions by tax revenues
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State Administration of Taxation.
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