{"id":7751,"date":"2021-05-19T06:30:00","date_gmt":"2021-05-19T06:30:00","guid":{"rendered":"https:\/\/focus.cbbc.org\/?p=7751"},"modified":"2025-04-23T09:53:11","modified_gmt":"2025-04-23T09:53:11","slug":"tax-reform-in-china","status":"publish","type":"post","link":"https:\/\/focus.cbbc.org\/tax-reform-in-china\/","title":{"rendered":"How likely is tax reform in China?"},"content":{"rendered":"

Although tax reform is currently not on the Chinese government\u2019s agenda, growing fiscal pain and rising costs for local governments have increased pressure to design a more sustainable tax system, Torsten Weller writes<\/span><\/h2>\n

The publication of China\u2019s 14th Five-Year Plan<\/a> (FYP) has attracted plenty of international attention, with much of the external commentary on the plan focusing on its emphasis on self-reliance and domestic consumption<\/a>. One area which has received far less scrutiny is China\u2019s tax regime. <\/span><\/p>\n

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That is an oversight. In fact, a recent decision by China\u2019s State Council has revived the debate over the need for tax reform in China, given the government\u2019s spending plans. On 21 April 2021, Premier Li Keqiang announced that the central government<\/a> would expand the fund it set up last year to directly help local authorities in supporting employment and economic recovery<\/a>. The government added that the fund\u2019s scope would be expanded to include the salaries of local civil servants and pension payments. <\/span><\/p>\n

The fund\u2019s expansion not only increases the central government\u2019s involvement in local government finances, it also raises questions regarding the planned increase of social spending under the new FYP. In particular, the lifting of hukou<\/em> restrictions for most Chinese municipalities is expected to increase the fiscal burden for local governments. Without a proper tax base, many will struggle to achieve the FYP\u2019s targets.<\/span><\/p>\n

What is the current tax policy situation in China?<\/span><\/h4>\n

China\u2019s local governments have long struggled with rising debt levels. By the end of 2020, local governments had amassed RMB26 trillion (approx \u00a32.9 trillion) in official debt, up 8% from the year before. Since 2015, this debt has risen by nearly 63%, according to data from China\u2019s Ministry of Finance.<\/span><\/p>\n

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Official debt of central and local Chinese governments, 2015-2020<\/em><\/p>\n

What\u2019s more, most observers agree that these figures are only the tip of the iceberg. Many local governments are known to have considerable off-balance sheet debt, often hidden in so-called local government financing vehicles (LGFV). Between 2015 and 2020, local governments issued over RMB16 trillion (approx \u00a31.8 trillion) in LGFV bonds on China\u2019s onshore market, over 60% more than it accumulated in official debt.<\/span><\/p>\n

China\u2019s central government has tried to get local debt under control, with varying degrees of success. It has halted expensive infrastructure projects, such as subways and luxury housing projects. It has also signalled that it will not pick up the bill when bonds issued by local governments go into default. <\/span>Yet reining in spendthrift municipalities has become more difficult just as local government revenue has been dwindling. China\u2019s last major tax reform in 2016 replaced the business tax \u2013 which was paid into local coffers \u2013 with a value-added tax (VAT) paid directly to the central government. At the same time, the central government\u2019s supply-side reforms further reduced the local tax base by abolishing licensing fees and reducing social welfare contributions.<\/span><\/p>\n