China gets heavy on mooncakes

A row over mooncakes has sparked a heated-debate over China's tax laws.

A health inspector checks a batch of mooncakes in Nanjing. This year China's inland revenue service has been enforcing taxes on mooncakes as a means to fund its pollution-fighting efforts.

As China prepared for its mid-autumn festival this year, mooncakes became a hot topic of debate.

These circular delicacies, typically filled with sweet bean paste, hit the headlines because for the first time, workers receiving them as gifts were told they were a taxable benefit.

Many employees may therefore feel this year's cakes have an unusually bitter taste to them when they come to mark the festival today.

"Now that even mooncakes are taxable, I prefer cash and shopping cards from my boss as holiday gifts because mooncakes are often over-packaged and cost more than their real value," Li Mao, a disgruntled worker from the city of Shijiazhuang told the state-run Xinhua news agency.

Mooncakes have always been a taxable benefit, but it appears China's inland revenue service has only this year decided to be more zealous in enforcing the rule.

Employers were reported to be handing out hundreds of dollars in "mooncake fees" to coincide with the mid-autumn festival, confident in the knowledge the taxman would not try to take their share.

While the "mooncake revenue" has attracted plenty of attention, this month has brought another piece of news on the tax front in China that is less headline-grabbing, but potentially more significant.

Starting from September 1, the revenue bands in China have been shifted in a move officials say will exempt 60 million people from paying income tax.

The monthly ceiling before income tax becomes payable has been raised from 2,000 yuan (Dh1,149) to 3,500 yuan, while the starting rate has been lowered from 5 per cent to a mere 3 per cent.

The move became necessary because significant wage increases have meant more people have become eligible to pay. Yet rapid inflation, with prices rising to about 6.5 per cent in July, has wiped out the improvements in spending power.

Those removed from paying tax are mostly middle-income earners because the low paid were already exempt from income tax. In some provincial cities, annual incomes may average as little as US$2,000 (Dh7,346), so only a minority of workers used to pay tax even with the old threshold.

At the upper end of the income scale, the boundaries between different rates have been lowered slightly so that the country's wealthiest will pay slightly more tax.

The government, ever mindful of maintaining "social stability" among a population that has no electoral safety net, has trumpeted its generosity in reducing its monthly income tax take by 160 billion yuan.

Overall, however, tax revenues have been growing faster than the economy as a whole. Between 1994 and 2006, the amount collected in tax rose by an average 18.2 per cent a year, while average annual GDP growth was 13.1 per cent.

While some adjustment to the income-tax rates and bands was necessary, plans to reform the system has generated even more interest and debate.

China is looking to learn lessons from more developed countries, where a culture of voluntary compliance has taken root.

Officials are also looking to help the tax system promote a more sustainable development path.

The country is the world's biggest producer of greenhouse gases and funds are needed for a massive clear-up.

"Certain provisions in the corporate income tax law may provide some incentives to energy-conserving companies," says Tony Kwan of PricewaterhouseCoopers.

That is just the start of it, however, as a raft of other tax measures are being rolled out to help to lessen the increase of China's carbon footprint.

"The current tax laws are defined for revenue-generating measures. I think tax measures for environmental protection will be used more and more in the future. It's becoming increasingly important for the central government and local governments," says Xu Yan, an expert in Chinese tax at the University of Hong Kong.

In the western Xinjiang region, a 5 per cent tax on oil and gas was introduced last year. Such resource taxes are aimed at limiting high-energy, high-pollution production and encouraging more efficient ways of operating.

They also give a significant boost to government coffers. In the first four months of this year, resources taxes collected in Xinjiang totalled 1.94bn yuan, more than four times the figure for the same period last year.

PricewaterhouseCoopers (PwC), in a report published this year, said proposals were in place under which "the scope of [resource taxes] would be extended". Additionally, PwC expects the rolling out of more environmental taxes, which would be applied to pollutant emissions.

It said tax would "be one of the major stimuli" to achieve the goal of restructuring the economy to reduce its environmental impact, something that was emphasised in China's 12th five-year plan, which gave a blueprint for development between this year and 2015.

The effectiveness of environmental taxation measures in countries such as Germany, Denmark and other European countries indicates these measures are valuable as part of a wider portfolio of regulations, says Dr Yan.

"For the government, there are several approaches: regulation, taxation and an emissions-trading system. [Environmental] taxation has been quite successful in other countries," she says, but cautions that environmental taxes alone cannot solve the problems.

"I think tax is an effective market-based instrument. You need tax but at the same time you need regulation and other measures. Tax is one way among other measures."