China to raise individual income tax threshold to beat price increases

BEIJING -- China is proposing to raise its monthly individual income tax levy threshold from the current 1,600 yuan (217.69 U.S. dollars) to 2,000 yuan, according to a draft amendment to the law on individual income tax.

The individual income tax threshold increase was believed to relieve the economic burden of medium- and low-income earners amid the recent price increase of some goods.

On Sunday, the draft amendment was submitted to the Standing Committee of the National People's Congress (NPC), China's top legislature, for deliberation. The amendment was expected to be effective March 1, 2008.

Finance Minister Xie Xuren told the legislative session that "raising the threshold of individual income tax collection from 1,600 yuan to 2,000 yuan means a reduction of 30 billion yuan in state revenue".

However, the rise in personal income tax collection threshold would free 70 percent of income earners from paying income tax. The current threshold of 1,600 yuan made 50 percent of income earners free from paying the tax.

Xie said "the increase of individual income tax collection threshold is within the country's financial bearing capacity and aims to relieve the economic burden of medium- and low-income earners."

China's consumer price index climbed 6.9 percent in November, marking the fourth consecutive month the index had been above six percent. Price increases for various goods have already placed a burden on common families.

The individual income tax cutoff point was raised from 800 yuan a month to 1,600 yuan starting in 2006. This was based on an investigation of the then citizen's consumption expenditure for basic living costs.

"Over the past two years, citizen's consumption expenditure for basic living further increased. This required us to readjust the individual income tax starting point again," Xie said.

He predicted that every income earner would bear an annual consumption expenditure of as much as 19,030 yuan, or 1,586 yuan per month, for a family's food, clothing, accommodation and transport. The expenditure was on a trend to further increase, therefore the individual income tax cutoff point was adjusted to 2,000 yuan a month.

A recent survey of 3,698 people showed that 97 percent of citizens said the current individual income tax cutoff point should be readjusted.

Wang Yijiang, an economic management professor at the Beijing-based Tsinghua University, said with the country's fast economic development the government could afford the tax cut.

The Ministry of Finance predicted the country's financial revenue in 2007 would exceed 5 trillion yuan, up 31 percent from the previous year.

Wang believed the increase of individual income tax cutoff point would help narrow the gap between the rich and the poor.

China is implementing a national unified individual income tax threshold. Some Chinese scholars suggested that the tax threshold could be varied in different regions in line with the local economic development.

They said living costs in economically prosperous cities, such as Beijing, Shanghai and Guangzhou, were expensive. The tax cutoff point in those cities should be higher. In economically backward areas, the threshold should be lower.

An Tifu, an economics professor with the Beijing-based Remin University, however, said it was not realistic for China to implement the varied individual income tax cutoff points in different areas. It would make talented people in the western areas more willing to move to big cities, making the regional social and economic gap widen further.