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China mulls VAT overhaul as govt revenues drop

Central Committee reconsiders VAT base and rates at Third Plenum as property taxes fall

China’s rulers are set for their third plenum in the current 5-year political planning cycle next month. Typically, the third plenum is reserved for economic reforms as part of the 5-year planning round.  The key issue will be tax reforms as government revenues fell 2.3% at the start of this year, part of decline that commenced before 2020. China raises large amount of revenues from property sales. It is the biggest fall in over twenty years and contributed to Fitch’s downgrading of Chinese credit in May.

On the choices for the Central Committee will be VAT changes, including:

  • Raise in the 13% standard rate
  • Consolidating the three reduced rates of 9%, 6% and 3% (likely merge supplies in 6% up into 9%
  • Extending the tax base
  • Collecting the tax at the point of sale by wholesalers or retailers, instead of from producers and importers
  • Providing more share to local government

The need to raise more consumption taxes come mostly from the bursting of the property boom. Aside from additional VAT revenues, there may be reforms of income taxes. These are very low by international standard, largely to maintain popular support, and so politically difficult to reform.


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