Taxes and Charges

TABLE 4.7 Bases, Rates, and Relative Importance ofLocal Taxes and Charges

Share oflocal Taxes Tax base Tax rate revenue, 2003 (%)

Urban maintenance and construction tax VAT and business tax 1–7% 5.55 Vehicle purchasing tax Vehicle purchase cost 0.1% 4.82 Agriculture and animal husbandry tax Agriculture and animal husbandry earnings Average 15.5% 4.30 Tax on special products Cost ofidentified special agriculture products 5–10% Contract tax Contract value 3–5% 3.64 Housing property tax Assessed value ofhousing property or rental income Assessed value ofhousing property: 1.2% Rental income: 12% 3.29 Educational surcharge VAT, business tax, and consumption tax 0.03% 2.34 Stamp tax Transaction value on documents 0.003–0.05% 2.18 Pollution charge Pollution Varies for different types ofpollution 0.95 Urban and township land use tax Occupied urban and town land 0.2–10 yuan per square meter, based on location and rank ofthe land 0.93 Farmland occupation tax Occupied farmland 15–150 yuan per acre 0.91 Resources tax Gas, oil, minerals, salt 0.3–60 yuan per ton 0.85 Land appreciation tax Increasing value ofreal estate transaction 30–60% 0.38 Vehicle and vessel use tax Vehicle or vessel Vehicles: 2–320 yuan 0.33 Vessels: 0.4–5 yuan per ton Fixed asset investment tax Investment amount 0–30% 0.05 Slaughter tax Cost ofslaughter animals for food 0.1% 0.02 Banquet tax Payment for banquet 15–20% 0

Source: Data from Ministry ofFinance and State Administration ofTaxation ofChina. Local Government Organization and Finance: China

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152 Baoyun Qiao and Anwar Shah

governments.Currently,such revenue comprises revenue from administrative units and institutions,funds raised by township governments,revenue from local fiscal departments,and revenue from SOEs.In 2002,the total local extrabudgetary revenues were US$41 billion,or about 41 percent ofall local budgetary revenues.

Local governments in China have access to additional revenues that do not form part ofbudgetary or extrabudgetary channels.They usually take the form ofsurcharges.The actual volumes ofthese revenues are difficult to know because local governments can hide this type ofrevenue.

Local taxes are collected by local tax agencies.Each local government has its own local tax agency,and the agency is supervised by both the local government and the local tax agency ofthe higher-level government.Although the tax system is harmonized by the unitary tax laws in China,the actual collection, especially oflocal taxes,is controlled by a model called “tax revenue task.”It is still the typical practice that,at the beginning ofthe fiscal year,the central tax agency,after consulting and bargaining with the provincial tax agencies,assigns as a revenue task to the provincial governments the total volume oftax that needs to be collected in the fiscal year.The provincial governments further divide and allocate the tax revenue tasks to prefecture or county tax agencies. The assigned total volume ofrevenue becomes the basic task for these agencies.

This approach to tax collection encourages,to some extent,abuse ofthe tax laws by these agencies.For example,local tax agencies can delay the tax collection to the next fiscal year ifthe assigned tax revenue task ofthe current fiscal year has been completed.In fact,delayed tax collection is a very common practice in richer jurisdictions in China,because their wealthier tax bases make it easier to complete the revenue task in advance.However, the tax agencies in poorer jurisdictions may collect tax in advance or delay tax refunds to complete the tax revenue tasks ofthe current fiscal year.In general,scheduling oftax collection is emphasized more than enforcement oftax laws for tax agencies.As a consequence,the “tax revenue task”model provides ample opportunities for local governments to change the effective tax rate on residents.In addition,the model gives greater discretion to tax officials,thereby opening up opportunities for rent-seeking and corruption.

Other departments besides the tax agencies may also exercise authority to collect revenue (Chen 2003;Ma 2005),other than taxes,at the discretion oflocal governments.In some extreme cases,a department may collect revenue without any legal authorization.For example,farmers paid US$14 billion in taxes and fees to local governments in 2003,or US$18 per farmer, a heavy burden by rural standards.Most revenues ofthis type are not collected through tax agencies,and more than 70 percent may not be legal.

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Recently,China expanded the rural tax and fee reform to all rural areas. With the objective ofreducing the tax burden offarmers,the rural tax and fee reform was first experimented with in eastern parts ofAnhui province in 1994 and then,two years later,was expanded to 50 select counties in 7 other major agricultural provinces.The government extended the experiment to all ofAnhui province in a bid to standardize the tax burden on farmers and to eliminate the growing administrative and arbitrary fees charged to farmers in 2000.In 2002,the Central Party Committee and the State Council pushed the reform further,and the number ofprovinces embracing it grew to 20 by 2002;620 million farmers,or three-fourths ofthe country’s total, benefited from the reform.More important,the financial burden on farmers was cut by at least 30 percent.

The Chinese government also decided in late 2003 to abolish,exempt, or lower 15 charges on the country’s 900 million farmers in a bid to reduce their excessive financial burden.The list ofthe 15 charges,published by the Ministry ofFinance and the State Development and Reform Commission, included fees for quarantine certificates,licensing for using water resources, education,land-use rights certificates,and fishing boat inspections.In addition,China started a reform to eliminate agricultural taxes in 2004,and the agriculture and animal husbandry tax and the tax on special products were abolished at the beginning of2006.These measures are intended to create a fairer,simpler,and more transparent local revenue system for rural areas.

Shared Taxes

Shared taxes represent a significant part oflocal revenues.Decisions about shared taxes rest with the central government.Under the current fiscal system,the shared taxes include business tax,VAT,enterprise income tax, individual income tax,foreign enterprise income tax,6 and stamp tax on security transactions.The sharing arrangement between the central and provincial governments is determined by the central government.The current sharing arrangements between the central and provincial governments—as well as the base,rate,and percentage oftotal local government revenue for shared taxes—are summarized in table 4.8.In 2003,the local part ofshared taxes was US$75 billion,accounting for more than 60 percent oflocal revenues.

Revenue assignment ofshared taxes among local governments is at the discretion ofthe provincial government.The Suggestions on Subprovincial Fiscal Relations,issued by the Ministry ofFinance and approved by the State Council in December 2002,provided some guidelines for revenue assign-