Photographer: Qilai Shen/Bloomberg

China Plans Income-Tax Overhaul to Bolster Consumption

  • Just raising the taxable base threshold is unfair: Lou Jiwei
  • Wages rising faster than productivity are 'unsustainable'

China plans to revamp its income-tax system to include deductions such as mortgage interest, education expenses and the cost of raising children, said Finance Minister Lou Jiwei, as the nation seeks to maintain consumption as a major growth driver.

QuickTake China’s Pain Points

The ministry submitted a draft plan to overhaul the personal income tax system for the nation’s State Council to review and will submit a draft law to the National People’s Congress this year, Lou said Monday at a briefing in Beijing.

China is striving to shift its economy away from a reliance on investment by boosting consumption, which contributed two thirds of economic growth last year. Income tax deductions would put more money into the pockets of ordinary folks at a time spending faces fresh headwinds from a tumbling stock market and weakening currency.

"Simply raising the taxable base threshold isn’t fair," Lou said. "If a person makes 5,000 yuan a month, he can live a decent life. But if he has children to raise and an elderly person to take care of, he’ll be pinched in his pocket. So a unified standard itself isn’t fair."

Consumer Interests

People earning a monthly salary higher than 3,500 yuan ($537) need to pay personal income tax under the current system. That threshold is about half of the average employee salary in the capital city Beijing.

Underscoring the need to keep spending on track, Premier Li Keqiang’s work report unveiled Saturday included plans to "adapt to the trend toward high-end consumption." China will "remove policy barriers, improve the consumer environment, and safeguard the rights and interests of consumers," Li said.

Buoyed by healthy wage gains, consumer spending has proven resilient so far to the slowdown in old growth drivers like manufacturing and housing investment, helping underpin the world’s second-largest economy. Lou said salary increases have risen faster than labor productivity in recent years, which he said is "not sustainable in the long run."

China is also overhauling business taxes, by introducing value-added levy in their stead. Lou said that revenue for both central and local governments will fall as the reform spreads across business sectors. He added that fiscal revenue as a whole last year "was not good."

The shift to a VAT system is scheduled to take effect in May. The pace of the conversion to a value-added levy has been slower than expected, Lou said. The delay was due to the complexity of the new system, he said. The new system will make new investment in unmovable assets, such as real estate, tax-deductible, and thus encourage more spending, Lou said.

— With assistance by Kevin Hamlin

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