The Path Choice of Consumption Tax Reform
According to the information provided by a CCTV news program, the overseas turnover of Chinese Unionpay holders increased by 33% year-on-year during the National Day Holiday period just past. The purchasing power of China has created the World Golden Week. Contrary to the hot overseas market, the domestic market is just so-so. According to MOFCOM's surveillance, from September 30 to October 7, sales of national key monitored retail and catering enterprises was 80.06 billion Yuan, increased by 15% or so comparing with the period of 2011National Day Holiday. The Orient Securities pointed out that during the eight days Golden Week holidays, the sales of department stores only increased 15%. If deducting the sales of September 30, their sales growth was only single digit or even unchanged, creating the lowest growth speed for the recent 5 years.
So why the overseas market is so hot and the domestic market so flat? The price is one of the most important reasons. For example, it costs 10,000 Yuan to buy a product in domestic market but only 6, 000 Yuan in the overseas market. What do you think is the choice of the consumers? But why the price is higher in the domestic market. The tax, especially the relatively higher consumption tax is an important factor. Hence, the public, including experts, universally indicates that reducing the tax is a way, while the Taxation Administration also has the tendency to reform the consumption tax. In recent days, the official of State Taxation Administration has revealed in the Fifth National Enterprise Tax Management and Innovation Conference that the consumption tax will reform in the future, but the direction of reform will differ from the expectation of the public. It is revealed that the reform will be conducted from the following aspects, first, broaden or narrow the collection scope, and increase the tax rate of products with characteristics of “Two High One Resource” (High energy consumption, High pollution and Resources Products); second, reform in the collection sector or pilot in the gas station to collect refined oil consumption tax from the consumers, that is, change the collection from enterprise into the individual resident.
Why the consumption tax shall reform in that way? The official explained it to serve the need of macro-control. Increasing tax rate of “Two High One Resource” can lead to reasonable consumption of resources. The tax collection for luxury products is for the social equity and serves the need to regulate the wealth gap. It is just like what has been pointed out when starting to collect consumption tax: increasing the tax rate of luxury products is meant to broaden the tax source of government and strengthen the public finance expenditure capacity of government.
However, there is still a long way to truly implement the goal of consumption tax. As pointed out before, the increase of tax rate of "Two High One Resource" can lead to more reasonable consumption. To play the role of this economic lever, there are following two premises: first, the tax rate of “Two High One Resource” shall be reasonable enough that it will neither be high enough to distort the market and increase the burden of enterprise for no reason, nor will it be low enough for enterprise to ignore the increase of cost; second, a sound public finance system is a must. To increase the tax can surely play the role of expanding the government financial capacity. But it is still a question whether the increase of financial capacity will absolutely lead to a more equitable society. If the increase of tax through consumption tax fails to be embodied by reasonable public expenditure, then such tax will only add cost to the private department, rather than play the role of social equity.
In the event that the above premises exist, how can we reform to make our consumption tax system more equitable and efficient by reviewing again the current Chinese consumption tax system?
As far as I am concerned, under the current background of sluggish economy, any measure to increase the tax shall be prudent. No matter to increase the tax rate of “Two High One Resource” or broaden the scope of luxury products, it will reduce the domestic demand in the form of increasing the burden of private departments, which will neither economic nor equitable finally. Take the consumption of luxury products as an example. Due to the excessively high tariff and consumption tax, shopping outside the country or overseas purchasing agency tends to become the main choice of most Chinese consumers of luxury products. It is estimated by the insiders that in 2011, Chinese tourists have purchased the up-market products for US$46 billion, equivalent to RMB 300 billion Yuan.
Let’s take a look at the tax items and tax rate of luxury products in the current consumption tax: the tax rate of golf and its equipment is 10%, the up-market watch 20%, the yacht 10%, the gold silver jewelry 5%, the non gold and silver jewelry 10% and the cosmetics 30%. The current consumption tax is very unreasonable just seeing from the tax rate. As the cosmetics have become the necessity of most people in the current society, the tax rate of 30% is definitely a problem. On the contrary, the tax rates for yacht and golf and golf equipment are on the low side. Therefore, even for the purpose of adjusting income distribution, such luxury products as golf equipment and yacht truly consumed by people with high income shall have their tax rate raised. The consumer group of these luxury products is the minority of high income group, and such luxury products falls into the true luxury product for high income group. So levying a heavy tax on them will not influence most consumers, and can truly achieve the effect of regulating income gap.
It is because of the excessively high tax rate of cosmetics that the consuming subject in the domestic first-tire cities transforms their perspective to such paths as purchasing agent apart from shopping going out of the country. According to the monitoring data of China Electronic Commerce Research Center, the transaction volume of overseas purchasing agency market of China reached RMB 12 billion Yuan, whereas the transaction volume of 2011 was 26. 5 billion Yuan, increasing by 120.83% compared with 2010. It is estimated that the transaction volume of 2012 for overseas purchasing agency market will reach 48 billion Yuan. But this purchasing agency market has always stayed in the gray area due to failure to provide relatively complete tax payment record. This year, a former air hostess will bring herself a catastrophe by engaging in purchasing agency business for over two years. She has cumulatively evaded taxes for 11.3 billion Yuan, and will be sentenced to imprisonment for 11 years and a fine of 500, 000 Yuan.
To solve such problems as consumption outflow because of higher tariff and consumption tax, many experts suggest increasing the domestic tax-free store in the domestic pilot provinces and cities whose economy is relatively developed. The tax-free stores are absolutely good, for they can leave part of the consumption inside the country. But it is far from enough. The consumption tax involves thousands of households, so a thorough tax reducing is a must, not just the tax free for particular high income group, which otherwise has violated the original intention of consumption tax.
Nevertheless, one thing is for sure in this consumption tax reform, which is to reform the collection sector of consumption tax. By pilotting in the gas station to levy refined oil consumption tax on the consumers, the tax collection has changed from enterprise into individual resident, transforming the collection of consumption tax from price including tax to price excluding tax, that is to transfer the collection sector of consumption tax till the final sales sector to realize the separation of price and tax.
The current taxes of China are almost collected with the price including tax and the consumers are unable to see their tax payment in the sales list. The biggest advantage of price including tax is that the consumers cannot aware the proportion of tax. Yet the disadvantage is also obvious, that is to increase the financial burden of company.
Take the example of refined oil consumption tax. In the first half year, the output of gasoline and diesel of China is respectively 37.58 million ton and 76.47 million ton. That is to say, on the premise that all of these products were sold out, all domestic refineries must pay the consumption tax of a total of 12.60 billion Yuan or so on behalf of consumers, the fee of which has largely occupied the capital of company production sector. In the meantime, as the consumption tax is the tax included in price, the phenomenon of repeated collection will exist when company is calculating the value-added tax. Still take the example of the first half year, if calculated by 13% for value-added tax, the oil company will pay an extra value-added tax for 1.64 billion Yuan in the half year.
In fact, such phenomenon not only exists in the oil industry, but also in nearly all industries. Then why this reform of collection sector for consumption tax only applies to the oil industry, not to all industries? In modern society, the oil is called the “Economic Blood” whose upstream and downstream products are almost throughout all national economy, so its status is absolutely important. Yet does it calculate as a special treatment if just applying this policy to oil. As some media points out, the beneficiary of this tax and price separation reform of collection sector is the production unit represented by two large groups, which makes no sense whatsoever.
Originally published China Times | 2012-10-19
