Tracking China’s Progress Towards Law-Based Taxation

UPDATE (Sept. 8, 2018): This post has been updated based on the 13th NPCSC five-year legislative plan.


China currently collects 18 types of taxes. They will generate an estimated total of 8 trillion RMB in revenue for the Central Government in 2018. But only six of them—providing only about a third of the central tax revenue—are imposed by laws (法律) enacted by the legislature, the NPC or its Standing Committee (NPCSC). The rest are governed only by interim regulations (暂行条例) adopted by the State Council—the Central Government itself. The enormous taxing power the State Council now wields was in fact granted by the NPC in 1984. Now, over three decades later, the NPC is reclaiming that power by gradually elevating the interim regulations into laws, with an eye to complete the process by 2020. In this post, we will explain why the NPC made the power grant in the first place and discuss what it has recently been doing to reassert its control over taxation.

NPC Authorizations in the 1980s

The story began in the late 1970s when China decided to give state-owned enterprises (SOEs) greater operational autonomy as part of the broader market-oriented economic reform. A key part of the SOE reform was the “tax for profit” (利改税) program. Under this program, instead of remitting their entire profits to State treasury, SOEs would be taxed but could keep the remaining profits. There was however one problem: Only the industrial and commercial tax (工商税) then applied to SOEs and it alone would not generate enough tax revenue. The State Council thus came before the NPCSC in 1984 and sought an authorization that would allow it to “draw up relevant tax regulations and promulgate them in draft form for trial implementation” during the tax-for-profit reform. (This approach was necessary because “the economic conditions were changing fast” and the drafts would “still need to be constantly enriched and improved in implementation,” explained the State Council.) In granting the request, the NPCSC also required the State Council to eventually submit the drafts to it for enactment. The same day, the State Council promulgated six draft tax regulations, including one on value-added tax (VAT), to take effect on October 1, 1984.

Just a few month later, in April 1985, the NPC passed another authorization, this time permitting the State Council to “formulate interim provisions or regulations” on “issues regarding economic system reform and opening-up,” provided that they do not contravene “the basic principles of the relevant laws and decisions of the NPC and its Standing Committee.” Similar to the 1984 authorization, the new authorization also required that the interim rules be eventually enacted into law by the NPC or NPCSC after they are “tested by practice” and the “conditions are ripe.”

The 1985 authorization covers the previous one because “economic system reform” encompassed the tax-for-profit program. Relying on the new authority, the State Council ultimately replaced all draft tax regulations (税收条例草案) with interim tax regulations (税收暂行条例). (The VAT, for instance, is now governed by the Interim Regulations on Value-Added Tax first adopted in 1993.) For this reason, the 1984 authorization was revoked in 2009, while the 1985 authorization remains in force.

Post-2013 Third Plenum Developments

After several rounds of tax reform, by the time the Communist Party held the Third Plenum of its 18th Central Committee in late 2013, 18 types of taxes were being collected (and only three in accordance with laws). The Third Plenum adopted a decision on “comprehensively deepening reform” that, in a section on the people’s congress system, vows to “implement the principle of law-based taxation” (落实税收法定原则). As government officials would later explain, this principle dictates that tax “must be specified in the form of laws by the legislature, which represents the people in the exercise of State power.” It is a “basic principle of tax legislation” and also “an important principle” established by China’s Constitution (article 56 of which provides that Chinese “citizens have the obligation to pay taxes according to law”—“law” is apparently interpreted here to mean only “statutes”).

As a first step to implement this principle, the NPC passed an amendment to the Legislation Law in 2015. It provides in part that only laws may be enacted regarding “basic systems for taxation such as the establishment of taxes, the determination of tax rates, and tax collection management” (Legislation Law art. 8, item 6). But the State Council may still be authorized by the NPC or NPCSC, as it was in 1985, to adopt administrative regulations on these matters when no law has been enacted (see id. art. 9). The various interim tax regulations, therefore, remain legal and effective.

A few days after the amendment passed, Xinhua reported that the Party had approved the Implementation Opinion on Implementing the Principle of Law-Based Taxation (贯彻落实税收法定原则的实施意见), drafted by the NPCSC Legislative Affairs Commission. The Opinion has not been and is unlikely to be released, but Commission officials summarized its gist in an interview with Xinhua:

  1. No more tax regulations will be adopted. Any new tax will be levied by laws enacted by the NPCSC.
  2. Current tax regulations will be elevated into laws “at the appropriate time,” starting with the easier ones—those that “do not involve tax reform.”
  3. For taxes that are being reformed (e.g., the VAT), the regulations may be first revised by the State Council before being enacted as laws.
  4. After all tax regulations are either elevated into laws or abolished, the NPC will be asked to revoke the 1985 authorization.
  5. The NPCSC aims to complete the whole process by 2020, following the (undisclosed) timetable set forth in the Opinion.

Tax Legislation Tracker

The NPCSC has already made some headway on this legislative Long March. In December 2016, it enacted the Environmental Protection Tax Law, replacing pollution discharge fees with a new tax. A year later, it passed the Tobacco Leaf Tax Law and the Vessel Tonnage Tax Law, which abolished the corresponding interim tax regulations. Around the same time, the State Council repealed the Interim Regulations on Business Tax (营业税暂行条例), bringing the total number of taxes back to 18. These 18 types of taxes, their governing authorities, and other relevant information are listed in the following table, which we will continue to update with any new development.

But time is running short. The NPCSC is scheduled to consider only two new tax laws in 2018: Vehicle Acquisition Tax Law and Farmland Occupancy Tax Law. Assuming it passes them by year end—which it realistically can do—it will have to start reviewing all remaining ten tax laws in 2019 and pass them by February 2020—a seemingly impossible task—if it still plans on asking the NPC to revoke the 1985 authorization in March 2020, when the NPC is expected to meet. We thus predict that we might see one or more draft tax laws submitted to the NPCSC later this year, besides the two planned.

# Tax Governed by
(year enacted)*
Levied/based on** Legislative development
1 Individual income tax
个人所得税
Law
(1980)
Taxable income of individuals and individually owned businesses
2 Enterprise income tax
企业所得税
Law
(2007)
Taxable income of enterprises
3 Vehicle and vessel tax
车船税
Law
(2011)
Taxable classes of vehicles and vessels
4 Environmental protection tax
环境保护税
Law
(2016)
Taxable air and water pollutants, solid waste, and noise
5 Vessel tonnage tax
船舶吨税
Law
(2017)
Tonnage of taxable vessels entering mainland Chinese ports from overseas ports
6 Tobacco leaf tax
烟叶税
Law
(2017)
Payment made to purchase tobacco leaves
7 Urban maintenance and construction tax
城市维护建设税
Interim regulations
(1985)
Excise and value-added taxes paid 13th NPCSC’s five-year legislative plan (Class I project)

State Council solicited comments on Oct. 19, 2018

8 Property tax
房产税***
Interim regulations
(1986)
Taxable property (excluding individually owned property for non-commercial use)
9 Stamp tax
印花税
Interim regulations
(1988)
Taxable documents concluded or received (including securities traded) 13th NPCSC’s five-year legislative plan (Class I project)

NPCSC’s 2018 legislative plan (preparatory project)

State Council solicited comments on Nov. 1, 2018

10 Urban land use tax
城镇土地使用税
Interim regulations
(1988)
Area of taxable land occupied
11 Land value-added tax
土地增值税
Interim regulations
(1993)
Value added to real estate after each transfer
12 Value-added tax
增值税
Interim regulations
(1993)
Value added to taxable products or services at each stage of circulation 13th NPCSC’s five-year legislative plan (Class I project)
13 Consumption tax
消费税
Interim regulations
(1993)
Taxable consumer goods 13th NPCSC’s five-year legislative plan (Class I project)

NPCSC’s 2018 legislative plan (preparatory project)

14 Resource tax
资源税
Interim regulations
(1993)
Crude oil, natural gas, coal, salts, and other taxable minerals 13th NPCSC’s five-year legislative plan (Class I project)

State Council solicited public comments on draft law (December 2017)

15 Deed tax
契税
Interim regulations
(1997)
Titles of land or houses transferred 13th NPCSC’s five-year legislative plan (Class I project)

NPCSC’s 2018 legislative plan (preparatory project)

16 Vehicle acquisition tax
车辆购置税
Interim regulations
(2000)
Taxable vehicles acquired (including those purchased or imported) Law pending
17 Import and export duties
进出口关税
Interim regulations
(2003)
Goods imported into or exported out of and articles entering mainland China 13th NPCSC’s five-year legislative plan (Class I project)****
18 Farmland occupancy tax
耕地占用税
Interim regulations
(2007)
Area of farmland occupied for building construction or non-agricultural construction Law pending

*Related implementing regulations (for laws) or implementing rules (for interim regulations) are not listed. The “year enacted” was not necessarily the year when the tax was first collected.
**These descriptions are given for informational purposes only and are not intended to be accurate statements of law.
***It may eventually be replaced by a new property tax named “房地产税,” listed as a Class I project in the 13th NPCSC’s five-year legislative plan and a preparatory project in the NPCSC’s 2018 legislative plan.
****The project is named simply Tariffs Law (关税法).

(Thanks to Xiaoyuan Zhang for invaluable research assistance.)


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