June 2011 – China’s 2011 Individual Income Tax Reform

On June 29th, 2011, China’s National People’s Congress passed the Individual Income Tax Reform proposal submitted by China’s State Council. The new individual income tax law is to reform the personal income tax mechanism and reduce the burden on those with low income. The new tax law will be effective from September 1st, 2011. The move is aimed at allaying public concerns over inflation and easing the tax burden on individuals with low income.

The two most significant changes made in the new tax policies are:

  1. Raise the personal income threshold from currently ¥2000 to ¥3500。
  2. Adjust taxation brackets. Reduce 9 levels of tax brackets to only 7 levels. The specific tax rate on each level is also adjusted.

Analysts said that raising the threshold and streamlining tax brackets will increase domestic consumption and improve living standards. Currently, the majority of taxpayers in China are from the low and middle income groups. Raising the personal income tax threshold will significantly reduce the percentage of working people who will be liable for personal income taxes, approximately from current 50 percent to less than 20 percent.

Raising the personal income threshold by ¥1500 has been the largest scale of threshold rise in China’s personal income tax reform history. The last rise in the personal income tax threshold came in March 2008, when the lowest level threshold was introduced for those earning 2,000 yuan a month from the previous figure of 1600 yuan.