China Mulls Consumer Tax Reform Ahead of Key Meeting

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Goldman economists highlighted potential reforms that may include expanding the tax base and increasing tax rates. These reforms, as outlined in a report by the Securities Times, could also involve shifting the collection point of the tax from producers and importers to wholesalers or retailers. Furthermore, there is discussion about sharing the revenue generated with local governments, an idea previously considered by China’s cabinet in 2019.

In anticipation of potential announcements at the upcoming Third Plenum of the Communist Party, analysts, including Yuting Yang from Goldman Sachs, suggested that policymakers might also consider simplifying the value-added tax (VAT) system. The Third Plenum, a closed-door gathering scheduled for next month, typically convenes top Chinese leaders, ministers, military officials, provincial heads, and leading academics to chart strategic economic courses.

The motivation behind these potential tax reforms includes creating sustainable revenue streams for local governments, which have been financially strained due to a prolonged downturn in the housing market impacting revenues from land sales. A reform of the consumption tax system, along with the introduction of a nationwide property tax, has been seen as crucial steps toward addressing these fiscal challenges, although progress has been hindered by the COVID-19 pandemic and the subsequent economic recovery.

Currently, China’s consumption tax primarily applies to products like tobacco, refined oil, automobiles, and alcohol, with all revenue flowing into the central government’s treasury. In 2023, this tax contributed approximately 1.6 trillion yuan ($221 billion), accounting for nearly 9% of the country’s total tax revenue, according to data from the Ministry of Finance.

Goldman Sachs analysts suggested that potential reforms could incentivize local officials to boost consumption, thereby aiding in economic rebalancing efforts. They drew parallels with the US system, where sales taxes play a significant role in state and local government finances.

Moreover, the analysts proposed that higher tax rates on luxury goods and energy could align with broader policy objectives such as reducing inequality and promoting a shift towards a greener economy. However, they cautioned that any implementation of these reforms is likely to proceed gradually, contingent upon improvements in the labor market and consumer confidence.

Goldman Sachs noted that while higher consumption taxes across a broader range of goods and services may not be imminent, there could be incremental changes starting as early as next year in specific categories, pending economic conditions and policy considerations.