Implementation of excise tax reforms in China will likely be part of the country’s broader efforts to promote a new round of reforms of the fiscal and taxation system, experts said on Thursday.
They said more endeavors are needed to rationally allocate the expenditure responsibilities of the central government and local governments while curbing those unnecessary and ineffective local government investment, therefore facilitating fiscal balance toward a more sustainable and healthy status.
Their comments came after some market observers said they expected China will advance excise tax reforms, as the third plenary session of the 20th Communist Party of China Central Committee will focus on further deepening reform and promoting Chinese modernization.
Excise taxes, sometimes referred to as “sin taxes”, are indirect levies imposed by tax authorities on the consumption of specific products or services considered to be harmful to consumers’ health and the environment, or luxury goods.
In China, excises apply to 15 types of products such as tobacco, alcohol, high-end cosmetics and refined oil, and tax revenues derived wholly belong to the central government.
Fu Yifu, a researcher at the Star Atlas Institute of Finance, said excise taxation can help improve industry structure, promote healthy and green consumption manners, and narrow income gaps between certain groups.
In addition, reform measures currently being discussed by market observers could help local governments increase revenues if implemented, Fu said.
In 2019, a reform plan released by the State Council clarified the directions of excise reform and asked to move the collection of excise taxation from the production and import link to the wholesale and retail link, and “stably” allow local governments to have related revenues.
A recent macro research report by Guotai Junan Securities predicted that reforms of excise taxation will likely expand the items subjected to the tax and adjust excise tax rates during the process of promoting the taxation on the sales links, allowing local government to retain some of the revenues.
However, Luo Zhiheng, chief economist at Yuekai Securities, said: “Such reform measures need time to get implemented, because they will largely expand the number of payers of excise taxes, and therefore impose higher tax collection efficacy requirements on tax authorities. Besides, allowing local governments to levy excise taxes on some items, such as tobacco, will likely encourage the production of these products, offsetting efforts to curb such undesirable consumption.”
Shi Zhengwen, director of the Center for Research in Fiscal and Tax Law at China University of Political Science and Law, said it is likely that more products with intensive carbon footprints will be subject to excise taxes, while such taxes on some products will be lowered or removed to promote consumption upgrades.
Experts also said solving fiscal challenges facing some local governments should not be the main purpose of excise tax reforms.
Luo said what is more important now is properly allocating expenditure responsibilities between the central and local governments.
Qiao Baoyun, dean of the China Academy of Public Finance and Public Policy at Central University of Finance and Economics, said local governments should curb ineffective investment to improve their fiscal status, rather than trying to increase revenue to support unreasonable spending.