Tracking China’s Progress Towards Law-Based Taxation

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 18^th 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.

(* There is some ambiguity as to what exactly must be completed by 2020: it could be either the enactment of the tax laws and revocation of the NPC’s 1985 authorization; or just the former task.)

Tax Legislation Tracker

Last updated: December 10, 2022

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.

#	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	Law (2020)	Consumption and value-added taxes paid	enacted in 2020
8	Building tax 房产税‡	Interim regulations (1986)	Taxable buildings (excluding individually owned buildings for non-commercial use)	—
9	Stamp tax 印花税	Law (2021)	Taxable documents concluded or received (including securities traded)	enacted in 2021
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	State Council solicited comments on July 16, 2019
12	Value-added tax 增值税	Interim regulations (1993)	Value added to taxable products or services at each stage of circulation	Law pending
13	Consumption tax 消费税	Interim regulations (2008)	Taxable consumer goods	State Council solicited comments on December 3, 2019
14	Resource tax 资源税	Law (2019)	Crude oil, natural gas, coal, salts, and other taxable minerals	enacted in 2019
15	Deed tax 契税	Law (2020)	Titles of land or houses transferred	enacted in 2020
16	Vehicle acquisition tax 车辆购置税	Law (2018)	Taxable vehicles acquired (including those purchased or imported)	enacted in 2018
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	Law (2018)	Area of farmland occupied to construct buildings or structures or for non-agricultural construction	enacted in 2018

(Thanks to Xiaoyuan Zhang for invaluable research assistance.)