By Deng Yuwen (China Daily)
Updated: 2007-12-04 07:00

A circular was issued to the effect that starting from January 1 next year, all individual taxpayers must report their incomes to the authorities using a new tax form. They will be required to state their income from stocks and property investments.

The circular of November 15, issued by the State Administration of Taxation (SAT), triggered stock market fears which caused the market to slump that day.

The SAT soon issued a clarification that the collection of taxes on stock investments would be suspended in an effort to ease market panic.

It was not the first time that the market had been alarmed by the possible collection of taxes, nor was it the first time that the SAT had issued such a clarification.

Every time there is a report about a tax on investment income, the market panics. The latest market fears have been cooled by the clarification, yet the market is still wondering when this tax will be enforced as SAT has only said it has been "suspended". Some analysts speculate it will be formerly introduced next year.

But this is unlikely, as numerous preparations have to be made such as establishing a database on individual stock investors.

Moreover, whether or not a tax should be imposed is a decision for the National People's Congress, rather than any administrative department. And submissions, discussions and reviews by the congress to the suggested tax plan will take time because of its complex nature. These procedures have yet to get underway.

However, the market would welcome any news about the new tax, instead of being kept waiting in anticipation. This could cause dramatic market fluctuations at any time.

Taxes collected on the income from securities, estate or other investments belong to the category of income tax. Currently, the waived amount in calculating an individual's income tax on salary is so low that China's income tax is much greater than that of many countries.

It would be better to impose less harsh tax on an individual's income. It would cushion the blow of rising prices for daily necessities.

Some experts think the tax on securities investment income would narrow the income gap among the different social groups and check stock market speculation. This policy, I am afraid, may not be easy to achieve.

The common feeling is it would have most impact on the common people rather than the rich.

The rumored rate of 20 percent tax on securities investment income seems to be significant, but the rich can afford it considering the rewards they reap from the stock market.

If they think their securities investments are no longer rewarding following the imposition of the tax they have abundant other investment options.

It would not be the same for the common people.

With more than 135.74 million accounts on the Shenzhen and Shanghai stock exchanges by November 29, the stock market has involved a huge proportion of the population, most of whom are common people of middle or low income. By investing their savings from their modest incomes on the stock market they are looking to increase it.

Their confidence in the market would be severely dented if they have to pay 20 percent on their returns as tax. Probably, they would quit the market, which would dampen development of the capital market.

It is worth stressing that the current taxation system should be revised in such a way that its overall burden is reduced.

Considering the current price rises, the public would see their lifestyles affected should their salary growth be lower than the consumer price index (CPI). If they are asked to pay tax on their securities investments, which is supposed to be a supplement to their salaries, it would be against the government's goal of boosting the public interests through the collection of taxes to further promote public service.

The CPI rose by 6.5 percent year-on-year in August, dipped to 6.2 percent in September and rebounded to 6.5 percent in October. During the same period, the income of the low-income groups rose only by 5 percent. Even if their income grows faster than the CPI this year, they would still feel the pressure due to increased expenditure on education, medical care, and the enhanced inflation expectation.

It is also the time to reduce taxes collected from businesses. The businesses are faced with a 17 percent value-added tax and 33 percent business income tax, both of which are much higher than the average in other countries.

Most small and middle-sized enterprises (SMEs), especially the private ones, are facing fierce market competition. Their profits are much lower than that achieved by the State-owned enterprises holding monopoly positions in the market. But these SMEs offer a considerable number of jobs. The influence to the society would be huge if these SMEs could not maintain their businesses because of heavy taxes.

It is now a high time to reform the current taxation scheme, both to boost social fairness and improve the lifestyle of the people. The government has seen a double-digit growth in its income for several years and it is now financially possible for the State to collect less taxes.

Deduction in individual and business income taxes is now the most convenient choice if an all-round taxation reform needs more time to be initiated. And if that deduction is not possible either, the bottom line should be not to impose new taxes that might affect the common people or the development of businesses.

The author works with the Study Times

(China Daily 12/04/2007 page10)