Business |  Accounting, auditing and taxation

China to lift personal income tax threshold to 3,000 yuan

By Zhang Fengming  |   2011-4-20  |     ONLINE EDITION

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CHINA is set to raise its monthly personal income tax threshold to 3,000 yuan (US$459) and trim tax brackets to cut the burden on low and middle income groups.

The National People's Congress Standing Committee reviewed a proposal on tax adjustment today. A new levy threshold of 3,000 yuan is set to replace the current one at 2,000 yuan after a heated debate among lawmakers. For expatriates whose taxable level is 4,800 yuan, it is unclear whether the new policy will affect them or not.

The current level is deemed too low as the majority of China's low-paid workers are covered by it. Some lawmakers have even suggested raising the level to 5,000 yuan.

"The new system shows clear aim to cut tax levy on the lower-income group while increase the tax levy on the more affluent people," said Freeman Bu, an Ernst & Young partner, today. "The focus is on taxes as a means of creating a fairer society."

China now levies personal income taxes in nine brackets, ranging from 5 percent to 45 percent, depending on income. In the new system, China cancels the brackets of 15 percent and 40 percent and notches up the limit of taxable income to enjoy lower bracket rate.

For instance, people who earn 4,500 yuan a month can still enjoy a 5 percent tax rate in the new model, compared with 500 yuan in the current system. Also, a monthly income over 80,000 yuan will be levied the maximum 45 percent rate, compared with 100,000 yuan now.

China defines income, for tax purposes, as salary plus bonus, commission, lottery earnings and other revenues.

China has tinkered with its tax system in line with per capita income growth. The individual income tax threshold was raised from 800 yuan to 1,600 yuan in 2006 and to 2,000 yuan in 2008.

The 800 yuan minimum was set in 1980 when earning this amount a month was only a dream for most people. Thirty years ago, owning a color television was considered a luxury. Today fancy cars, exotic holidays, Gucci handbags and Tiffany jewelry have become the hallmarks of a higher standard of living.

Bu said the tax adjustment would help lower-income families by putting more money in their pockets at a time when inflation is eroding their disposable income.

China's Consumer Price Index, the main gauge of inflation, rose 5.4 percent in March to a 32-month high.

Morris Gu, a Shanghai white-collar, said he can use the spared tax money to pay for his increased mortgage due to a spate of bank interest raises.

"Although the deduction is not as high as 5,000 yuan, it's better than nothing," said Gu, whose after-tax salary is 6,000 yuan now.

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