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China's family-based income tax reform still far off

Updated: 2012-03-30 10:11


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BEIJING - News that China is considering creating a nationwide individual tax information database, widely regarded as the first step in clearing technical hurdles for wider tax reform, has triggered a fresh wave of discussion about the country's taxation system.

The database is reportedly being created to lay a foundation for moving individual income taxes toward a fairer collection process based on gross family earnings.

But experts have said that family-based tax collection will be difficult to pull off in the short-term, as the change will require a complete overhaul of the current taxation system.

Need for change

China's current income taxation system, which mainly taxes personal income according to income sources, has long been criticized over loopholes and a lack of consideration for family expenditures.

The divided tax items may lead to a tax gap between people with multiple channels of income and those with a sole income source, said Zeng Kanghua, head of the Finance and Tax Research Institute at the Central University of Finance and Economics.

Although many taxpayers are around the same income level, family expenditures, including education and elderly care, can vary substantially, said Huang Hehong, associate professor of the School of Law at the Chinese People's Public Security University.

"Levying taxes based on family units will help fully reflect the actual financial status of taxpayers," Huang said, adding that the change will help to promote fair distribution.

But many obstacles need to be removed before the final implementation of the plan, as the country must first shift to a gross income taxation system in order to create a base for family-based taxation.

"If you cannot tax individual incomes as a whole, you cannot tax family earnings as a whole," said Zhang Bin, a researcher at the Institute of Finance and Trade Economics under the Chinese Academy of Social Science.

Challenges ahead

To switch to a gross income taxation system, authorities will first have to create a series of support measures, including the previously mentioned database and a tax declaration system.

The country's large population will pose a major challenge if China shifts to family-base income tax, said Jia Kang, director of the Research Institute for Fiscal Science under the Ministry of Finance.

Jia said international practices include a family-raising coefficient to compute individual taxes, although the method requires sophisticated management conditions in order to verify information filed by taxpayers.

Zhang said that since family-based taxation requires more information to be filed, authorities should create related verification measures and design tax deductions for different cases.

"Family-based taxation will require careful and thoughtful design, considerable cost and certain conditions. China isn't ready yet," Zhang said.