CHINA'S tax issue seems to evoke controversy. People complained about taxes when government revenue was growing nearly three times as fast as gross domestic product. When tax revenue growth slowed to 9.8 percent in the first half of this year - only 2 percentage points faster than GDP - people did not stop complaining.

It seems the problem may not be how much the government is collecting in taxes, but rather how the money is collected and distributed.

Vickie Tan, the Central China Tax Leader with Ernst & Young, sat down with Shanghai Daily to discuss the expectations and challenges of tax reform.

Q: Has tax reform in China been too slow in coming?

A: Frankly, I think the Chinese way of getting slowly and building consensus and comfort is all to the good. China is the world's largest country and the second-largest economy. Any changes, especially in taxes, need to be made very carefully because they impact not only government revenue but also foreign direct investment (FDI) and GDP.

Turnover taxes, including the business tax, value-added tax and consumption tax, make up more than 60 percent of all government tax revenue. It takes time to make changes in so many categories.

Q: Do you think the the current VAT expansion that moves some business from business tax to VAT will be the beginning of a series of tax reforms?

A: The VAT is at the heart of the Chinese tax system. For sure, other reforms are also being rolled out. These reforms will support the transition of China from middle level economy to a highly advanced and harmonious economy. In the long term, the essential question is how to distribute tax income between the central and local governments. So, to put it bluntly, I'm optimistic that China will ultimately have a fair, rule-based and world class tax system. There will be bumps on the road, but we will get there.

From the point of tax cuts, there is an overall consensus that the proportion of turnover taxes should be reduced. The proportion of direct taxes, such as those imposed on profits and income, is too low compared with developed countries. That's why we call it a structural tax cut but it's not an overall tax cut.

Q: In tax reform, there are always some companies and individuals who feel they are not getting the promised benefits. What's the problem with taxation?

A: This is a global problem. Look at the US, where the fairness of the tax system is front and center of the presidential debate. There is a famous saying: "There are only two things in the life that are sure - taxes and death." But, without taxation, we cannot create world-class infrastructure and society. However, we can do better and one area that is disturbing is local execution.

At the top, policies are well thought out but the local government may have their own priority. For example, in 2002, there was a move to standardize taxes but local government continues to bid against each other to attract FDI and thereby creating a vicious race to the bottom. At the end of the day, this is a "zero-sum" game. There could be a location promising to refund all tax to companies to cinch an investment deal, then the government runs out of funds.

Q: How do they deal with that?

A: The local government then either imposes other taxes or increases collection of fees. If we could recommend some changes to China policymakers, one would be to eliminate regional differences.

But again, that is related to the issue of distribution of tax income between the central and local governments. Local governments now need to pay heavier bills for education, social security programs, food safety, affordable housing, healthcare and other projects. It's impossible to ask local governments to cut taxes too much. They will need other sources of income to sustain their spending.

Q: What about the property tax?

A: This is a political and social "hot-potato." It makes sense from the standpoint of revenue generation, social harmony and economic justice. But, obviously, it needs to proceed step-by-step because the implications are profoundly huge. Introducing a property tax is the trend, but exactly what kind of houses should be taxed and by how much are still questions.

Q: Some multinational companies complain that the taxation environment in China has deteriorated in recent years. What do you think?

A: This is another tough question. The answer to it depends on your yardstick. For sure, if you look back 15 years, China was rolling out a red carpet for all foreign investors with generous tax incentives. China today is on its way to become an advanced economy. Of course, our tax system has to evolve to fit the new reality and the vision.

The focus has been shifted and is more to ensure that China gets a fair share of tax revenue. Officials once said, "If you are here to use our resources and want to dig money from our people's pockets, then there is no reason to offer you preferential tax treatment." China cannot keep its market closed after joining the World Trade Organization, but any companies wishing to tap the market must pay their share of taxes. As a result, some companies may think that taxes have become tougher and more complicated. It's a natural outcome.

Q: Based on your experience, which aspects of taxation do companies complain about the most?

A: Companies can deal with tough enforcement and even higher tax. But, they want transparency, clarity, rule of law and the right to appeal. While we are moving in that direction, unfortunately, there are still policy uncertainties and situations where local government exercises their autonomy in the implementation. For example, exporters can enjoy value-added tax exemptions, but the details of implementation haven't been released yet.

Q: Talking about the future of tax reform, what changes do you expect?

A: This is a sea-wave change in China in value-added tax, cross-border taxation, individual income tax and property tax, tax administration law. We will see reform on every front as China marches forward to the advanced economy status. The pace of change is hyper-kinetic. For example, in the last two years, we have 1,265 circulars issued just on value-added tax. Individual income tax reforms are also on schedule already.

Q: The personal income tax threshold was raised last year.

A: This is a welcome step. Due to rapid inflation and social pressure, there is a need to have grand scale reform in individual income tax. Authorities are considering collecting the tax on a household basis, deducting some reasonable expenses and avoiding duplicate taxation. In this way, the authorities hope to nurture more middle-class families and stimulate domestic consumption.

Q: Do you think that process will take least several years?

A: The individual income tax concerns everybody, and people are eagerly waiting for changes. I believe that the authorities are also clear about this. As far as we know, the plan for individual income tax reform is underway full swing.

Q: What other trends do you see?

A: Tax is always used as a lever to achieve China's social and economic goals. The government may provide new incentives to help China to transit into a socially harmonious, technologically advanced, economically prosperous society within a clean and green environment.

For example, resources tax will be expanded to guide efficient exploitation of resources as China has limited resources to sustain its development. Whiles, reforming the consumption tax is to guide personal spending.

If people need to pay more tax in addition to the value-added tax for some products, they will think twice before making purchases.

In addition, we are going to see more enforcement in tax collection and administration and increasing requirements on tax compliance.