China’s Income Tax Generation Collapses

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Jul. 20 – China’s income tax base has shrunk even further as taxpayers are badly hit by the global downturn.

With a small income tax paying base of about 30 million people from a population of 1.3 billion, the country’s inland revenue has struggled to generate sufficient income and meet monthly targets.

China’s income tax base is small because it implements a pre-tax salary level that excludes individuals who are only making a certain amount from income taxes. This threshold is sufficiently high to discount most of China’s workers.

Moreover, as salary levels have fallen and workers are being laid off, temporarily or otherwise, the tax bureau is left with a decreasing amount of revenues. This has been compounded by export businesses closing shop or having their revenue streams dry up.

Turnover taxes and other monthly business taxes have also fallen dramatically. Tax collection from domestic companies is notoriously lax, with many businesses making so-called  ‘arrangements’ with tax bureau officials to pay a fixed amount each year, rather than the correct amounts that should be due according to actual turnover.

Some professional estimates suggest that only 5 percent of actual taxable revenues may have been collected from China’s domestic companies due to the fixed tax rates being applied and now even this amount is being whittled away.

VAT remains China’s main tax generator contributing more than 50 percent of all taxable revenues. However, with income tax revenues plummeting, China’s tax bureau is under severe strain to generate revenues in quantities that can support China’s fiscal stimulus plan.

The deterioration of China’s ability to generate tax revenues from its businesses may pose a threat to its fiscal and economic plans well into 2010.