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September 23, 2011

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The tax man cometh

CHINA'S raised the personal income tax exemption threshold on September 1 to reflect rising incomes. Yao Minji talks to five professionals who say it makes little difference.

Americans say that nothing is certain but death and taxes. For many Chinese, taxes have not been certain or clear until this month, when the government raised the personal income tax exemption threshold from 2,000 yuan (US$313) to 3,500 yuan.

New tax regulations went into effect on September 1 and have stirred considerable controversy.

"This is the first time I have really cared about the term taxes, and realized it actually could be changed. I used to think it was an iron-clad, fixed deduction from my income every month, and would be there for many years," 29-year-old Paul Ren tells Shanghai Daily.

"When it was reported that income tax reform was on the government's agenda, it caused a big wave, both in media and my personal life. Everyone was talking about it," he says.

He observes that in recent years housing prices have nearly tripled or even more in many places, and overall living costs rose significantly, yet taxes stayed the same.

Ren works for the Shanghai branch of a multi-national enterprise, and is only one among many Chinese who had high expectations about the possible reform.

In July, it was reported that the exemption threshold would be raised to 3,000 yuan and the number of tax brackets would be trimmed from nine to seven. There was great and vocal public discontent, pushing authorities to lift the threshold to 3,500 yuan.

The current raise is the third and the largest so far. The first was in 2006 when the threshold was raised from 800 yuan to 1,600 yuan.

Karen Lin was one among many people who benefited from the change. The 26-year-old analyst was serving an internship five years ago, in her junior year in university. The company paid her 900 yuan a month. When she got her pay in January, the accountant congratulated her, "Lucky you, now you don't have to pay tax anymore."

In 2008, the threshold was further raised to 2,000 yuan, but Lin didn't even remember it since it was only five to 10 yuan difference on the payroll.

After this third raise, the difference between old and new taxes can be as much as 480 yuan in their post-tax and post-social welfare income, if their salaries are between 8,000 and 12,000 yuan. Those who make more than 38,600 yuan will pay more in taxes.

Lin, like Ren and many others who will benefit from the change, had high expectations. Shanghai Daily interviewed five people at different income levels to find out about expectations and reality in this first month of the new calculation method.

Since it was implemented from September 1, it has been reported that some companies didn't catch up with the new system and still paid according to the old. Shanghai's tax bureau issued an online statement requesting all companies to follow the new method, and advising those who found their income tax deducted incorrectly to call 12366 for information and complaints.

inda Zhang, 27

Creative director

Private advertising company

Monthly income: 10,000 yuan (post-tax and social welfare)

Tax before September: not clear

Current tax: about the same

Zhang is supposed to be a big beneficiary of the new method, yet, life is no different for her, like many others don't benefit significantly from the new system.

Many young Chinese who work for privately owned companies like Zhang are offered a fixed post-tax and post-social welfare salary. The companies pay their taxes and social welfare based on the minimum level to save operational costs.

"I had a big discussion with my colleagues to see if it is possible to ask for a small salary increase since the company will pay less now, but we agreed that our stingy boss would just ignore our request anyway," Zhang says.

Peter Liu, 34

Director of research and development

Investment consultancy

Monthly income: 50,000 yuan

Tax before September: over 10,000 yuan

Current tax: about the same

Liu is one of the very few required to pay more after the new calculation method. With his income level at 50,000 yuan, he is to pay 170 yuan more in taxes, yet he hasn't felt too much change at all.

His income, which is flexible depending on the month, is calculated in a very complicated way, with base salary, commissions, all kinds of allowances, reimbursement for spending, and so on. He also has quite a bit one-time income, which makes his taxes variable.

Liu didn't pay much attention in July when he first heard of the new calculation, or when he got paid on September 20.

"I probably paid a bit more this month, but it's probably just around 100 yuan, and I don't see that as a problem at all. After all, the whole mechanism of taxation is that the richer and more successful contribute more to the country," he says.

Lynn Wang, 23

Assistant to director

Join-venture trading company

Monthly income: 4,000 yuan

Tax before September: 175 yuan

Current tax: 15 yuan

Difference: 160 yuan

When Wang got her salary on 5th, she went straight to the bank and withdrew 160 yuan, the amount of the money that was added to her income due to the new calculation method.

Benefit from tax law just 480 yuan

From B1

Wang slipped the money into the envelope that she prepared in August, and swore that she would do the same every month until next September.

"I just want to save them separately. If I don't do it, they'll probably be spent without leaving any traces. It is just the money for a not-even-fancy dinner out or half of a not-even-pretty dress from a small shop," Wang says.

She plans to save all these extras to buy a big present for herself.

Karen Lin, 26

Market research analyst

Foreign bank

Monthly income: 8,000 yuan

Tax before September: 825 yuan

Current tax: 345 yuan

Difference: 480 yuan

Lin is one of those who benefits the most (in numbers) from the new calculation method, as she will have 480 yuan extra on her salary sheet. This is part of the reason she closely followed the news, until she got paid on the 5th.

"I feel a bit lost at the moment, because that nearly 500 yuan just went nowhere. I can't remember how I spent it, but I'm left with about the same amount of money as I had before. That 500 yuan just sort of disappeared," she recalls.

Lin blames it on the continuously increasing prices and living costs, which makes it "difficult to understand that a 100-yuan note is basically gone once you use it."

"I'm quite disappointed that I don't feel real changes at all, but I'll pay more attention on my spending next month and see if I can feel richer," Lin says.

Paul Ren, 29

Director of customer relations

Multinational enterprise

Monthly income: 15,000 yuan

Tax before September: 2,225 yuan

Current tax: 1,870 yuan

Difference: 355 yuan

Ren just had his best year and was twice promoted since January. His salary rose from 12,000 to 15,000 yuan over the last eight months. But when he heard about the new calculation method in July, right after his second promotion, he joked, "Wow, it would be more beneficial if I didn't get promoted."

For an income level of 12,000, he would have 480 yuan more on his payroll sheet, now he has 355 yuan more. It was quite exciting and Ren and his colleagues agreed soon after the July announcement that they would throw a party together, using the extra month on their pay day.

"We usually get paid on the 15th, and we have been planning the celebration since the first of the month," says Ren.

"But the party was just to party, because 355 yuan is not that big a change for me."

Ren ended up spending all of the 355 yuan extra, and 80 yuan more for the celebration with a dinner and a karaoke session afterwards.

History of taxes

China didn't have a real taxation system for more than 30 years after 1949, due to the fact that almost everybody worked for the government or state-owned enterprises. From 1950 to 1980, taxes represented less than 50 percent of China's fiscal revenue, with the highest level at 49 percent in 1980 and lowest at a mere 29.6 percent in 1960.

It was in 1980, when the effect of reform and opening up began to take hold - and people started to make money - that authorities made significant changes to the tax system. However, it had little impact on most citizens since the exemption threshold was set at 800 yuan, while the average wage was around 30 yuan per month. The goal was mainly to collect taxes from those who work for foreign companies.

The threshold stayed at 800 yuan in 1994, when the new (current) tax law was implemented. At that time, the average monthly wage was around 300 to 500 yuan.

Since then, China has gone through enormous economic and social transformations. Development has been headlong and income levels and prices doubled every few years, yet the tax threshold stayed the same.

In 2006, it was still 800 yuan when many university graduates in Shanghai could easily get an entry-level job for 2,000 yuan a month. The threshold that once was too high to have any impact was then too low. The first tax adjustment in 25 years raised the level to 1,600 yuan per month.

In 2008, it was further raised to 2,000 yuan and this September to 3,500 yuan.


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