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Experts call for cancellation of interest tax
( 2003-10-27 07:59) (China Daily)

China should cancel taxes on interest earned from personal savings deposits, some economists are advocating.

The idea is just one of the several suggestions proposed by a group of experts and officials at the Ministry of Commerce.

The proposals also include raising the threshold for levying personal income tax.

Zhang Peisen, a senior expert with the Taxation Research Institute under the State Administration of Taxation, said cancelling the tax on interest earned is possible and necessary because the tax fails to meet its original goal of stimulate investments and consumption.

"A lack of investment channels has seriously curbed the use of private money,'' he said.

Although the government has already decided to reform the banking sector and diversify financial services, options are still very limited when it comes to safe and profitable private financial products, Zhang argued.

The fledgling stock market is also very volatile and full of irregularities, he said.

Treasury bonds might be an exceptionally ideal means of investment because of their combination of safety and profitability, he said.

But those who hold bonds only account for a small proportion of the population.

In most cases, people still put their money in banks.

In rural areas where incomes are lower, amounts deposited increase even faster than in cities because rural people are too far away from the stock and bond markets or insurance brokers.

"The tax also did not effectively stimulate the expansion of domestic consumption,'' Zhang said.

Despite the country imposing an interest rate tax and cutting interest rates eight times since 1996, the growth of social consumption is still far less than that of bank deposits.

Weak consumption resulted from residents' low expectation for their incomes' growth, Zhang said.

The unsound social security system has forced most of Chinese who deposit their money in banks to depend on it for future expenditures in housing, medical treatment and children's education, he said.

The interest tax has actually cut the residents' income further.

Although some people have non-salary incomes, for most of China's residents -- especially laid-off workers and farmers -- interest rate earnings have become an important source of income, he said.

The application of the interest tax has actually reduced the purchasing power of most Chinese, he said.

Zhang Xueying, a senior economist with the State Information Centre, said the country is likely to cancel the interest tax and even raise the interest rate in the second half of next year.

"China is expected to witness higher growth in gross domestic product (GDP), fixed assets investment and the consumer price index (CPI) next year, if no further actions are taken to cool down the economy,'' Zhang said.

If the country's GDP and fixed asset investment continue to grow at a higher rate in the remaining months of this year and next year, and the CPI rises 2 to 3 per cent, the country may cancel the tax and even raise the interest rate, he said.

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