The reconsideration of income tax on low earners has resulted in the threshold for the tax to be applied being raised by 1,500 yuan ($232), 500 yuan more than originally proposed, and taking an estimated 60 million wage earners out of the tax system. From Sept. 1, tax will start being due on incomes of above 3,500 yuan a month, up from 2,000 yuan a month. In addition the number of tax bands is being cut to seven from nine, with the rate on the first band being cut to 3% from 5%.
The changes lift the threshold above the average monthly wage for salaried workers. The percentage of earners liable for tax will fall to 7.7% from 28%, costing the government 160 billion yuan, according to Wang Jianfan, vice director of the Ministry of Finance’s taxation department. Some of that will be recovered by raising taxes on higher earners. More than 82,000 members of the pubic commented on the original tax cut proposal with two our of three wanting an even higher threshold than finally agreed on.
Proposed income tax cuts that would have taken 50 million people out of having to pay tax have been put on hold. State media’s report of the closing session of the National People’s Congress said the proposal wouldn’t be put to a vote until after more public opinion had been sought and further discussion undertaken. That won’t take place until later this year.
It is highly unusual for the legislature to do anything but rubber stamp legislation put in front of it. The finance ministry had approved, and the State Council signed off on the proposed tax cut, which would have raised the threshold at which income tax kicks in to 3,000 yuan a month from 2,000 yuan a month as part of the broad range of measures to offset the impact of inflation on low- and middle-income Chinese.
Question now is whether this presages a broader range of tax changes to tackle inflation–raising the threshold to 5,000 yuan a month is being talked about along with lessening the number of tax bands at which higher rates start and raising their thresholds, too–and whether some of the additional cost will be clawed back by higher taxes on higher earners. We are also intrigued by where the undermining of the initial proposal lies.