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China: Individual Income Tax Law Revised

(July 11, 2011) On June 30, 2011, the Standing Committee of China's National People's Congress (NPC) adopted an amendment to the Individual Income Tax Law that raises the threshold of tax exemption for individual income from monthly wages and salaries from RMB2,000 (about US$309) to RMB3,500 (about US$541). (Text of the revised Individual Income Tax Law [in Chinese], The Central People's Government of the People's Republic of China official website (June 30, 2011).) The new Law will take effect on September 1, 2011. (Id.)

The tax rate schedule for wages and salaries income is also amended. Under the current Law, taxable income from wages and salaries is subject to progressive tax rates ranging from 5% to 45% in a nine-bracket system. The new Law will cut two brackets, corresponding to the 15% and 40% rates. As of September 2011, monthly taxable income of RMB1,500 or less will be subject to a 3% tax rate; under the current Law, such income of RMB500 or less is subject to a 5% tax rate and that ranging from over RMB500 to RMB1,500 is subject to a 10% tax rate. However, a higher tax will be imposed on monthly taxable income of greater amounts under the new Law. For example, taxable income of more than RMB80,000 to RMB100,000 is subject to the 40% rate under the current Law, but to the 45% rate under the new Law. (Id. Schedule I; text of the current Individual Income Tax Law (effective Jan. 1, 2008) [in Chinese], Central People's Government official website.)

Monthly taxable income as defined by the Individual Income Tax Law refers to the monthly gross income minus the above-stated exemption and other deductions (id. Schedule I.). According to the implementation regulations of the Law, the basic endowment insurance, basic medical insurance, unemployment insurance, and housing provident funds are deducted from the taxable income. (Implementation Regulations of the Individual Income Tax Law (effective Jan. 1, 2006) [in Chinese], art. 25.)

According to the Ministry of Finance, after the new Law takes effect, the number of people paying individual income tax will be reduced from 84 million to 24 million, and the tax burdens on low-income earners will be greatly reduced. (Individual Income Tax Threshold Rises to 3500, Middle, Lower Income Earners' Tax Burden Lightened [in Chinese], XINHUANET (July 1, 2011).) On the other hand, it is clear that the tax burdens on taxpayers with comparatively high income will be heavier. This reflects the principle of the government tax and finance authorities in amending the individual income tax law: “to increase the tax for high-income earners, to decrease the tax for medium-income earners, and to impose no tax on low-income earners.” (Id.). In April of this year, when the amendment to the Law was still under debate, the State Administration of Taxation had issued an order to the tax authorities at all levels to strengthen the collection of individual income tax on high-income earners. (Laney Zhang, China: Collection of Individual Income Tax on High-Income Earners to Be Strengthened, GLOBAL LEGAL MONITOR (June 20, 2011).)

The public had been expecting a higher increase in the exemption threshold, as rising inflation and high housing prices erode incomes and add to the cost of living, said Xinhua News Agency. (Chinese Expect More from Income Tax Amendment, Xinhua (Apr. 25, 2011).) The final exemption threshold is RMB500 greater than the amount originally proposed by the government, because the NPC was “taking public concerns seriously,” according to the NPC Standing Committee's Commission for Legislative Affairs. (Yan Hao, China Revises Individual Income Tax Law, Raises Exemption Threshold, XINHUA (June 30, 2011).)