News, cover, issue 463, April 5, 2010
Translated by Tang Xiangyang
Original article: [Chinese]

On April 1st, Seeking Truth (求實 Qiushi), a monthly magazine published by the Chinese Communist Party, published an article authored by the Minister of Finance Xie Xuren. The article outlined the ministry's plans to speed up reform of the country's taxation system and its intention of providing local governments with an increased and sustainable source of revenue.

On March 31st, members of the Budget Working Committee of the National People's Congress, along with experts of the National Development and Reform Commission (NDRC) and the Development Research Center under the State Council, held a meeting to discuss possible projects aimed at reforming the fiscal and taxation system. The Taxation Department of the Ministry of Finance held a similar meeting on the same day.

"Twenty-five" Key Reforms

Discussion of reforms to China's fiscal and taxation system is once again heating up. with the issue of the distribution of tax revenue between the central and local governments firmly on the agenda.

Since the 17th National Congress of the Communist Party of China, establishing a balance between the revenue of government with the cost of their responsibilities, has become the core consideration of the reform to the distribution of tax revenue.

Many academics believe this means that the central government plans to raise taxes and then transfer the additional revenue to local governments.

However, for local governments, the core of this round of reform is to obtain control over legislating for and managing taxation.

Since the end of 2008, when China adopted its four-trillion-yuan stimulus package, local governments have been suffering from a shortage of capital due to pressure to make large investments despite a lacking dependable revenue streams.

"As local governments are prohibited from issuing debt and the central government refuses to provide them with the authority to introduce taxes, while at the same time these local governments are charged with the responsibility of over seeing development and social security projects. This is happening even as the central government is taking more of the local government revenue - this is the central problem at the core of the current system. The fiscal and taxation system has to be reformed now," said Ni Hongri, a researcher with the Development Research Center of the State Council.

In the article published in Seeking Truth, Xie described how some local governments were either gathering supporting capital for public projects by running up debt or providing limited financing for those projects, which impacts on the effectiveness of central policies and increases the financial burden of local governments.

During the initial stage of the 11th five-year plan, some ministries researched the fiscal and taxation system and stated they would release a tentative proposal for reform, but this proposal never emerged.

According to a participant of the meeting held by the Budget Working Committee of the National People's Congress, the reform of the fiscal and taxation system would be an important task for the government during the12th five-year plan. Many ministries are studying and planning for reform, but so far they have yet to issue a complete proposal.

Local Governments Hope to Gain Taxation Rights

The dispute over how to increase the income of local governments dominated last week's meeting of the Budget Working Committee of the NPC.

They came up with two proposals regarding reform. The first proposal does not grant any taxation rights to local governments; it states the central government will transfer revenue to local government after raising taxes.

The second proposal provides local governments with some authority over taxation and grants them control over some new tax items. It's widely believed that the second proposal would be more difficult to implement.

Some believe, restrictions should be relaxed for certain tax items, such as allowing local governments to decide the level of taxation based on the local circumstances.

Most people believe a simpler plan would be to revise the proportion of the distribution of shared taxes between the central and local governments.

For example, currently the value-added tax (VAT) is divided between the central and local governments according to a ratio of 75 (central) to 25 (local), it might be possible to change the proportion to 60 to 40 or even to 30 to 70.

"There is no need to revise the tax laws or the way taxes are collected. We only need to alter the way it's distributed. I think this type of reform has a greater possibility of success," a participant at the meeting admitted to an EO reporter.

But the author has learned from official sources that such a design is already not being considered as a serious option.

Xie Xuren wrote in his article that, "the central government will, on the basis of a uniform taxation system, give local governments some tax management power." The "tax management power" includes authority to pass tax legislation, authority over tax adjustment and management, collection and tax revenue. Currently, the central government is in complete control of the  management of China's taxation system.

"The taxation power of local tax items should return to the local governments, even the legislation rights of some local taxes may be given to them," Ni Hongri suggested. He said, while legislation rights of some big local tax items should continue to be under the control of the central government, the legislation rights of smaller tax items, along with the right to collect and manage the taxes, can be left to local governments. The local governments may also decide the level of taxation of smaller tax items within a given scale.

Expanding the Financial Resources of Local Governments

Local governments will have increased tax revenue if the central government transfers the above taxation rights to them. During the past few years, local governments have been lacking major tax items and the necessary taxation rights, thus limiting their access to revenue.

According to the Finance Minister's article, the financial capability of local governments is to be strengthened by increasing their revenue which will be aided by the transferring of capital from the central government. The increased revenue will be used to meet the standard expenses and public needs of local governments, especially those in central and western China.

A more realistic way of reform is readjusting the tax distribution system between the central and local governments. Currently, local tax items mainly include a business tax, property tax, land use tax, a local value-added tax, natural resource tax, vehicle tax, an agricultural land tax, etc. 

The Ministry of Finance also hopes the property tax which is currently under discussion will become the main source of  income for local governments in the future. An official with a key ministry said, the property tax, without doubt, will become the key source of revenue for local governments.

Meanwhile, revenue from business tax, a local tax item, would be incorporated into the central government's responsibilities. One official told our reporter that local governments, especially those in western China, always expressed strong opposition every time the scope of the business tax is tightened because of the integration of business tax and value-added tax. But, he said, this loss to local governments could be regained by the revenue transferred from the central government.