China’s new resources tax regime has came into effect, taxing oil and gas producers on the value of what they produce, instead of its weight or volume. It is the royalties model on extractive industries that is common in much of the world. The change will significantly boost provincial governments’ revenues at a time when local-government debt is of growing concern to central-government policymakers. Forget the official explanation that this is about environmental protection and resource conservation.
Or at least it will raise the revenues of the coastal and western oil-producing provinces. Inland coal-mining provinces will not benefit as much. China’s coal mining companies just don’t have the profits to absorb the tax hit in the way the big state-owned oil and gas companies do, for all Beijing’s efforts to consolidate the coal industry. This Bystander is also tempted to think that applying the resources tax to coal now would work through to consumer prices in a way that the oil and gas SOE’s won’t be allowed to pass on. So we don’t expect the tax, which is starting at a flat 5%, to be applied to coal, or metals, companies anytime soon.
Eventually it will come, though. The pressure from provincial governments will be intense. A pilot scheme raised Xinjiang’s government’s take from 370 million yuan in the first half of 2010 to 2.3 billion yuan in the same period this year. The near-term question is whether oil and gas companies will shut down economically marginal fields as a result of the new tax.
China Bystander 
The bottom-line here is that, proper and justified tax deductions must be undertaken.