Society

China's new tax cut good news for consumers

(Xinhua)
Updated: 2011-04-20 16:24

BEIJING - The threshold of China's personal income tax (PIT) will be raised to 3,000 yuan ($455) if China's top legislature passes the first reading of the proposal.

The Standing Committee of the National People's Congress began to assess the draft on Wednesday. The second examination will start in June. Once agreed upon, the new tax rate will become effective in the second half of this year.

Related readings:  Law amendment mulled to cut personal income tax  China to plug loopholes in tax collection  More taxes coming as loopholes closed

Xie Xuren, minister of China's Ministry of Finance estimated that a higher threshold will eliminate 99 billion yuan in tax revenue. Vice-minister Wang Jun said earlier that it would reduce the number of taxpayers by 48 million, or 12 percent of the tax base.

This is good news for consumers, as inflation recently hit a 32-month high in March and is continuing to increase. It is also a necessary measure to realize the country's goal of closing its widening income gap, and make consumer spending a major driver for the world's second largest economy.

In 2010, China collected over 480 billion yuan in PIT, which accounts for only 6.3 percent of the government's total tax revenue. However, as far as boosting consumer spending is concerned, this amount will be significant.

Liu Huan, the deputy dean of the School of Taxation of the Central University of Finance and Economics, said that the PIT threshold hike is good news for most people, since the current 2,000-yuan PIT threshold is already lower than average living costs in big cities such as Shanghai and Beijing.

"Raising the PIT threshold will boost the purchasing power of low-income groups and help subsidize low and middle-income workers amid soaring prices." he said.

China's retail sales of consumer goods rose 16.3 percent year-on-year to reach 4.29 trillion yuan ($657.29 billion) in the first quarter of this year, the National Bureau of Statistics (NBS) announced last Friday.

Consumption was slowed down by higher commodity prices and interest rates. The growth of retail sales in the first quarter slowed down by 2.5 percent from the fourth quarter in 2010, a decrease of 1.6 percent from a year ago.

The People's Bank of China, China's central bank, announced its second interest rate hike this year on April 5. This was the fourth such increase since the start of the year.

To use an example, if 100 million people enjoy a tax cut of 200 yuan, their purchasing power will be increased by 20 billion yuan in total, a number that is approximately as much as the total sales revenues of 50 department stores and 20 large-sized supermarkets combined, according to an analysis from the Da Cheng Fund, a leading Chinese fund management company.

The PIT adjustment, combined with the construction of low-income housing, may add as much as 200 billion yuan to the country's total consumption power, according to a report from Honghuan Securities.

The PIT threshold was raised from 800 yuan to 1,600 yuan in 2006, and bumped up again to 2,000 yuan in 2008. The 800 yuan minimum was established in 1980, when China's first tax law was enacted.

Chi Fulin, Executive Director of the China (Hainan) Institute for Reform and Development, said that making ordinary people wealthier should be a top priority for the government over the next five years.