CHINA: Amended laws still put heaviest burden on the poor

BEIJING - China has tried to make its tax system more progressive in recent years.

In September 2011, it passed amendments to the individual income tax law, which included exempting an estimated 60 million Chinese earning under 3,500 yuan (S$700) a month from paying income tax. This threshold was raised from 2,000 yuan a month. It meant that just about 8 per cent had to pay income taxes, with top earners getting the largest tax hike.

The revised tax brackets ranged from a 3 per cent levy for taxable monthly incomes at or below 1,500 yuan, to 45 per cent for amounts above 80,000 yuan. In the past, the highest tax rate of 45 per cent had applied only to incomes above 100,000 yuan.

But while the amended laws look fairer, analysts such as economist Mao Yushi say the authorities still fail to collect the right tax amounts from high-income earners. This is partly blamed on the patchy, loophole-ridden collection system, as well as problems tracking the hidden assets of China's wealthy, including corrupt officials.

China's total "grey" income in 2010 was 9.3 trillion yuan, or 30 per cent of gross domestic product (GDP), China Reform Foundation professor Wang Xiaolu estimated in 2010. Much of this is squirrelled away in property, complex corporate structures or siphoned overseas.

Critics also say the tax system would be regressive as long as China remains heavily reliant on indirect taxes which put the heaviest burden on poorer Chinese.

China derives roughly 70 per cent of its total revenues from value-added taxes (VAT) as well as business taxes, which are typically passed on to the end consumer. Income tax and other direct taxes make up the rest.

So even though less well-off Chinese are exempted from paying income taxes, they will have to fork out a bigger chunk of their pay for indirect taxes.

This proportion - which can be as high as 30 per cent - is typically twice the level borne by affluent households, reported the People's Daily in 2011.

graceng@sph.com.sg