China to Raise Deductible Income Rate for IIT to RMB3,000

The Chinese government reached an agreement on March 2 to lift the deductible income rate during individual income tax (IIT) collection and to reduce the number of tax rate levels in a progressive rate system. The issue will be passed to the National People’s Congress for further discussion.

Experts speculate that the government will raise the deductible individual income from the current RMB2,000 to RMB3,000. If that becomes the reality, not only will every person working in China with a monthly income over RMB2,000 see a smaller IIT deduction, but 20 percent of the country’s employees will be totally exempt from paying IIT.

Many experts believe the reform is highly necessary because of the country’s rapidly growing individual revenues, price levels, and social polarization. Chinese Premier Wen Jiabao called the IIT adjustment the first “practical thing” the government will do for its people this year.

China’s income deduction standards seem to hit more and more low-income individuals. In 1980, when the government set the deductible amount at RMB800, the number was almost 12 times more than the average wage of RMB63.5 at the time. In 2006, when China raised the standard to RMB1,600, it was slightly lower than the average wage of RMB1,750 in the year. When the current RMB2,000 deductible standard was set in 2008, it turned into 82 percent of that year’s average wage of RMB2,435. The standard would seem even lower now compared to the 9.6 percent and 10.7 percent of increases in 2009 and 2010’s respective average wages.

Commentators also pointed out that the IIT collection did not do much to reduce China’s ever-enlarging income gap. According to related statistics, the average income in the country’s urban areas is 3.3 times higher than in the nation’s rural areas, and an upper manager’s salary is roughly 128 times higher than the country’s average wage. China’s Gini coefficient – a measure of inequality of wealth – has stayed higher than the international warning line 0.4 over the past 10 years, showing the country’s disparity has gone beyond the acceptable limit.

The coming IIT reform also aims to reduce the current number of tax rate levels from nine to five or six. In addition, economists hope the new adjustment to enable every tax rate level to apply for a larger taxable income span (e.g. a single 10 percent tax rate applying for taxable incomes ranging from RMB500 to RMB5,000) to reduce the burden of low-income groups.

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