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Tax Reform Aims to Plug Loopholes

Taxation authorities are mulling reform of the personal income tax system by clubbing total income under one head and lowering the top rate to check evasion and simplify computation.

Currently, taxpayers pay personal income tax on 11 different categories, such as salary, rental income and freelance earnings, with different thresholds and rates.

"A unitary tax scheme could solve the problem," a State Administration of Taxation (SAT) official, who did not want to be named, told China Business News.

The current scheme presents loopholes to high-income earners who might divide their income into several categories for evasion, he added.

Only a small proportion of the country's top earners filed personal income tax statements before yesterday's deadline the first time SAT has required those who earn more than 120,000 yuan (US$15,400) a year to do so.

According to the latest SAT statistics, 1.37 million people across the country had filed their income by March 30; but the figure accounts for only 15 percent of the estimated 6-7 million high-income earners in the country, according to experts.

Sources at SAT also said there are plans to reduce the number of income tax bands from nine to five and cut the top rate.

People currently pay a progressive income tax ranging from 5 to 45 percent on incomes starting at 1,600 yuan (US$206) per month.

The sources said SAT has set the goal of implementing the changes by 2010.

According to Gao Peiyong, an expert in finance at the Chinese Academy of Social Sciences, the requirement on income tax returns sets the foundation for a unitary scheme.

But experts warn that the revised tax scheme should take into account the conditions of taxpayers.

An Tifu, a retired professor in finance with Renmin University of China, said taxpayers should be allowed deductions for housing loan repayments, children's education and medical costs, like in many developed economies.

"The current computation ignores housing, education and medical care expenditures, which, in many cases, are shouldered by individuals," he said.

Personal income tax receipts totaled 245.2 billion yuan (US$30.65 billion) in 2006, up 17.1 percent year-on-year, according to SAT figures.

(China Daily April 3, 2007)

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