China Said to Consider Wide-Ranging Consumer Tax Overhaul

  • Finance Ministry submits tax plan to State Council, people say
  • Consumer tax reforms may affect cosmetics, alcohol, tobacco

China Said to Consider Tax Overhaul

China is considering a consumer tax overhaul, according to people familiar with the matter, the latest indication reforms are being accelerated to help speed the shift toward a more consumption-led economy.

The Finance Ministry has submitted the tax overhaul proposal to the State Council, said the people, who asked not to be identified because the discussions are private. The plan may change after it’s debated by ministries that are part of the State Council, China’s cabinet, one person said. Finance officials broadly support tax cuts on cheaper cosmetics and toiletries, and talks also include raising alcohol and tobacco taxes, one person said.

The proposal would be another step toward a broader tax code overhaul following reforms of the value-added tax in May that will ease corporate payments. Changes are needed to keep up with shifting consumption trends as products once seen as luxury goods are now every day items for China’s rapidly expanding middle class.

The overhaul may have wide-ranging implications, from spurring budget-conscious smokers to kick the habit or making it less desirable to take a trip to South Korea to load up on beauty products. It also could tip the balance of government finances: Whether to give a greater share of consumer tax revenue to provincial governments instead of the central government is also being debated at the State Council, one of the people said.

Healthier Habits

Such tax reform would be "a step toward a transparent tax system" that also aims to encourage consumption and healthier spending habits, according to Ding Shuang, the head of Greater China economic research at Standard Chartered Plc in Hong Kong.

Another measure being discussed is whether to levy taxes on energy-related products such as charcoal used for heating, according to one of the people.

The Finance Ministry didn’t immediately respond to a faxed request for comment Tuesday.

The central government mandates and collects taxes nationwide on consumer goods, which brought in revenue of 1.1 trillion yuan ($165 billion) last year, Finance Ministry data show. Most consumer goods are exempt from the tax, which applies to products including cosmetics, alcohol, tobacco, jewelry and fireworks sold by retailers and wholesalers.

The State Council weighs such proposals and seeks input from other ministries before deciding whether to proceed with a plan or send it back for modification.

Under the new value-added tax system unveiled earlier this year, taxes in the construction, property, finance and consumer service sectors will now be applied to the value added -- such as the difference between wholesale and final sales price for a retailer -- instead of a revenue-based levy. The central government said it will further expand its budget deficit to help cover the shortfall and may redistribute some VAT revenue back to provinces.

— With assistance by Yinan Zhao

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