Property tax not just aimed at taming home prices in China

By Xia Dan Source:Global Times Published: 2018/3/8 21:38:39

Illustration: Luo Xuan/GT


China will "prudently advance legislation on real estate tax," Premier Li Keqiang said on Monday while delivering his annual government work report at the opening of the 2018 two sessions. It is expected that the country will go one step further in rolling out a property tax nationwide, an arrangement that is common in most other countries.

There is already a tax system for activities related to real estate in China, with 10 types of taxes, including tax on the use of arable land, land value-added tax and deed tax. But the structural problem with the tax system is that it doesn't add much to the costs of holding onto a property.

The closely watched property tax is now in place only on a limited scale and narrow basis.

Other than the two cities - Shanghai and Chongqing - where a limited property tax has been implemented as a pilot scheme since 2011, the country still abides by the provisional regulations on real estate tax enacted in 1986, according to which individuals' not-for-business homes are exempt from property tax. Even in the case of the two pilot cities, the taxable items mostly include newly purchased homes, which are taxed purely on the value of one-time transactions. The pilot scheme also uses low tax rates.

In light of this, China's property tax reform is supposed to essentially focus on addressing the structural issue with the existing tax system, by tilting the taxation toward a property tax levy.

In specific terms, this means a combination and modification of the current taxes levied on property development and transactions so as to lower the tax burden on the flow of new homes and second homes. Additionally, strengthened efforts will be required to push for taxes on holding a property, which means an extension of the pilot scheme into the wider region, the broadening of the tax base to include the stock of existing homes, and also the availability of dynamic assessment of property values. The experience of developed economies has shown property taxes in countries such as the US, UK, France and Japan contribute more than 10 percent to government coffers.

The property tax push, nonetheless, would require some complementary efforts. First, the nation should ramp up property tax legislation given that tax can only be backed up by the authority of the law. For instance, the existing provisional regulations are administrative rules rather than part of a law. A bill for a property tax is only being drafted now, and according to the nation's legislative procedures - which include the submission, review and passage of a bill - the announcement and implementation of the game-changing bill will not take place until after 2020. And according to the principles proposed by Finance Minister Xiao Jie, the pilot scheme is unlikely to be expanded substantially prior to the passage of the bill.

Second, the administrative overlap and a complex galaxy of rules and regulations that the property tax bill is supposed to rely on should be well handled. The property tax reform involves the Ministry of Land and Resources, the Ministry of Housing and Urban-Rural Development, the Ministry of Finance, the State Administration of Taxation and the Legislative Affairs Office of the State Council, among others. There needs to be a clear division of tasks and coordinated efforts among different government departments as well as efforts to comb through the existing rules to ensure the new bill can build on the stock of existing laws and regulations.

China also needs to push ahead with a series of institutional reforms. For example, a national registration platform for property has been in place across the country since the end of last year. In the next step, a system for property valuation should be established. Also, reforms should be compatible with each other. For example, property tax reform should be linked with income distribution and individual tax reform to allow taxation to play a role in adjusting income. In this case, the US individual income tax system - in which those with high incomes pay more and those with low incomes can receive refunds after paying their taxes - can serve as a reference.

Having said that, the reform is intended to foster the property sector over the longer term.

The collection of property tax is not directly aimed at controlling home prices, as shown by the experience of other countries, in which property tax has only played a small role in curbing home prices. It could even be the case that the tax would push up home prices when there is a shortage of supply. The property tax reform is supposed to result in an improvement to the fiscal and taxation system and make taxes truly a wealth and resources adjustment tool so as to serve as a boon for both the property sector and the economy at large.

The levying of a property tax would raise the cost of holding a property and thus squeeze out speculative home purchasing. It would also help to reduce vacancy rates, and push vacant homes into the home rental market. On top of that, the property tax would help to shore up local government coffers, even if it might take a long time to make a difference in this regard.

The author is a senior analyst with Bank of Communications in Shanghai.

Posted in: INSIDER'S EYE

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