Policy shifts may focus on luxuries, tobacco, polluters

Industry experts say that the main purpose of the much-discussed possible consumption tax overhaul is to adapt to the upgrading of the consumption structure in China.

Certain cosmetics and tires that used to be regarded as luxury goods have become everyday items for the public, leading many experts to recommend tax cuts on cheaper cosmetics, while raising taxes on luxury products and activities, including tobacco and golf.

Products that are energy-intensive or highly polluting could also be included in the scope of consumption tax collection.

Jiang Zhen, a researcher with the National Academy of Economic Strategy at the Chinese Academy of Social Sciences, said the possible expansion of consumption tax collection to top-grade services is walking in step with the value-added tax reform in May.

Reforms of the value-added tax will bring tax cuts of about 900 billion yuan ($135 billion) to 1 trillion yuan at the local government level, which is roughly the size of the consumption tax revenue, said Xu Shanda, former deputy administrator of the State Administration of Taxation. Statistics from the Ministry of Finance show that taxes on consumer goods nationwide brought in revenues of 1.05 trillion yuan last year.

According to the usual practice of previous tax reforms, the central government will provide subsidies to the local governments as a reform incentive. Many experts suggest that the government should collect consumer taxes at the retail level rather than at the production level and put them under local revenues.

Xu said moving consumption tax collection from the production level to the retail level may also create some problems, such as increasing the difficulty of tax collection and management, considering that there are multiple layers of retail in China.

An official with the department of finance from a western province of China, who declined to be named, said consumption tax revenues previously belonged to the central government, but due to policy adjustments, some of the small categories of taxation, such as solid hardwood flooring, may turn into local government revenues. Taxes on liquor consumption are also likely to be partially returned to the local government.

However, this change will bring limited growth of local revenues because more than 90 percent of consumption tax revenues come from tobacco, liquor, oil and automobiles, which are still mainly central government revenues, said Zhang Bin, director of the department of taxation studies at the National Academy of Economic Strategy of the Chinese Academy of Social Sciences.