"We are in a dilemma," Jin, director of the State Administration of Taxation (SAT), said during an interview with Business Weekly.

The dilemma stems from the fact that someone in society has to pay a price whether Jin's administration increases or decreases taxes.

The tax commander-in-chief is under intense pressure, from a tight-fisted finance ministry seeking increased tax revenues to battle lingering deflationary pressures and from individuals and companies who want lower tax burdens.

China is faced with unprecedented budgetary pressures this year. An expansive spending package, initiated two years ago to reinvigorate economic growth and to meet the basic living needs of laid-off workers is straining State coffers and prompting calls for more tax revenues.

But the tax system is also being called upon to help fine-tune the economy and to help iron out income disparities, beyond the conventional task of raising revenues. This raises a whole new array of thorny issues the tax minister must deal with.

Jin and his subordinates, however, appear to be rising to the task.

Taxing e-commerce

In order to protect taxation sovereignty and to practice equality, China will not exempt burgeoning electronic commerce from taxation, as some developed countries strongly advocate, the tax supremo said.

The principle of tax neutrality dictates that tax policies should not vary between different forms of trade, Jin said. "The electronic form of e-commerce does not change its nature of trade."

And developing countries may put themselves at a further disadvantage in the burgeoning sector of on-line commerce if they follow in the footsteps of some developed countries and announce a tax exemption, as a tax-free climate is expected to help industry leaders build their market shares even larger, experts said.

They argue that not taxing on-line transactions would result in a huge drainage of revenue to developed countries in the form of income taxes. Income taxes account for the majority of total tax revenues in developed countries such as the United States.

"If I were to attend an international conference on e-commerce, as the tax minister of a developing country, I'm afraid, I would have to disagree (with a tax exemption for e-commerce)," Jin said.

He said the pace of on-line trading is still fettered in China, where a much-needed logistical system and an on-line payment system are far from mature. "But we cannot boost its growth by allowing a tax exemption," he added.

Jin said the SAT has set up a special team to handle taxation issues on e-commerce, like how to prevent tax evasion in cyberspace, which experts believe will be a hard nut to crack.

He said an overwhelming difficulty in collecting taxes from the Internet is finding out how to locate taxpayers, especially in transactions of invisible commodities such as intellectual property rights and cross-border deals.

Backing growth

Jin confirmed that the administration is considering revising the value-added tax (VAT) to encourage fixed assets investment, in a bid to facilitate efforts to get the economy out of the deflationary grip.

"We are working on it. It is unanimously agreed that it will be stimulative to investment," he said.

Jin said China's current VAT, which prohibits fixed asset investment from being credited against sales, is contrary to most other nations' experience. It was implemented in 1994 to help stabilize tax proceeds and curb inflationary pressures at that time.

"Now the situation is opposite."

He said a major concern in the enforcement of VAT reform is a huge bite it is expected to take out of not-so-ample tax revenues. Experts have estimated that a nationwide launch of the reform would reduce tax revenue by 60 billion yuan (US$7.2 billion) to 80 billion yuan (US$9.6 billion) each year.

"We are trying to find a balance (between the reduced taxes and increased investment)," Jin said, adding that the launch of VAT reform would require strengthened efforts against tax evasion, co-ordinative policies concerning other tax varieties and an optimized structure of fiscal spending to offset the reform's effect.

He said SAT will strictly monitor recently enacted tax policies intended to promote economic growth.

China re-imposed a long-shelved tax on interest rate returns on bank savings accounts by individuals in November 1, 1999, to spur lackluster consumer spending; it suspended a tax on fixed-asset investments at the beginning of this year and announced an income tax reduction for technical upgrades to boost investment. It raised tax rebate rates for export-oriented commodities twice in 1999 to support exports.

On another front, the official said tax policies will play an important part in promoting economic growth in western China, but cautioned against overestimating the value of tax incentives in the nationwide drive.

"Taxation plays an important part, but not the deciding role," he said.

Excessive reliance on tax cuts would reduce local governments' abilities to make investments in lifeline infrastructural projects. Instead, he said, more emphasis should be put on improving the investment environment.

He said a more decisive factor in tax policy-making is setting industrial guidelines.

The SAT issued favourable tax policies to attract investment to the western areas after the government initiated an extraordinary "go west" campaign to help the less-developed hinterland.

Inheritance tax

Authorities are considering levying an inheritance tax to address a widening income gap between the rich and the poor and a social security tax to raise funds to meet growing social security needs.

"There is still much co-ordinative work to do (before it is levied)," Jin said, referring to an inheritance tax which is expected to be announced later this year.

He said legal assistance is being sought to pave the way for the implementation of the new tax, which has finally found its place on the legislative agenda of the National People's Congress (NPC) after 50 years on the back burner.

Legal problems remain, such as how to define personal possessions, how to locate taxpayers and how to evaluate a legacy as a newly enacted real name system covers only bank savings, Jin said.

Both the Inheritance Act and the Civil Law need to be amended to stipulate that an estate can be divided only after an inheritance tax levy is paid, he said.

"It's up to the NPC vote to decide when it will come out," Jin said.

The minister assured the public that the new tax would not affect the vast majority of Chinese because it is mainly intended to redistribute the fortunes of the richest, not to raise more revenue.

In developed countries, only 1 per cent to 3 per cent of deceased property owners are inheritance taxpayers.

"Our legislation also absorbs foreign experience," he said.

The income gap between the rich and the poor has been widening in China since it embarked on the reform and open-up policy two decades ago, giving rise to calls for passage of an inheritance tax that was proposed as early as 1950.

Eighty per cent of China's 6 trillion yuan (US$720 billion) in personal savings in its financial institutions are reportedly owned by only 20 per cent of the depositors.

Tax experts have strongly supported the new tax, saying it will help guarantee social stability, prompt donations to social welfare activities and strengthen the role of taxation in redistributing wealth.

Jin said the SAT is also considering optimizing the personal income tax system, which is currently the government's major tool to address the income disparities.

"But in view of the national condition, we will probably have to maintain the current level," he said.

China's personal income tax threshold stands at 800 yuan (US$96) and is levied under a 9-level progressive rate system.

Elsewhere, Jin said China would levy a new tax to raise enough funds to meet increasing needs of social security expenditures as the number of laid-off workers from the State sector keeps growing.

Social security fees, which are being collected for the purpose and have seemingly failed to fill a widening funding shortfall, would then be replaced by the new tax, he said.

Tax experts have been calling for a social security tax to improve the efficiency in use of funds and to stop a huge gap of implicit pension debts born in a major pension system reform in 1997.

Jin said the social security tax should be standardized and should be be levied on more people for the sake of equality.

Fees into taxes

The tax authorities' significant attempt to have some fees converted into more rational taxes, while abolishing unnecessary fees,is expected to help ease financial burdens on individuals and businesses, while leading to a real increase in tax proceeds.

"The problem is that there are too many fees, even when comparable to taxes," Jin said, referring to the huge amount of fees collected each year.

The fragmented use of fees, instead of uniform taxes has resulted in arbitrary levies on individuals and firms; much of the money raised in this manner has been used inefficiently.

Analysts estimate that the ongoing fee-to-tax campaign, currently being pioneered in rural areas, will reduce the overall financial burden, a combination of fees and taxes, by 2 percentage points of the gross domestic product (GDP) upon completion, while substantially boosting tax revenues.

China's overall tax burden was valued at 12.6 per cent of the GDP last year, far behind developed countries and its developing peers, Jin said.

Addressing tax reform, the minister said preparatory efforts have not been relaxed when it comes to the controversial fuel tax.

Use of the tax is expected to blaze a trail for fee-to-tax reform, however, its implementation was delayed earlier this year by an unanticipated hike in world oil prices.

"We are going to bring it out at a proper time," Jin said, without giving further details.

The fuel tax, to be launched along with a vehicle purchase tax, will replace unreasonable road tolls that have caused widespread resentment.

Revenue growth

China's tax revenues grew rapidly during the first half of the year, largely due to strong momentum in economic growth, but tax growth is expected to subside a bit because of several policy-based downward forces, Jin said.

Tax collectors shepherded 597.3 billion (US$72 billion) of tax proceeds into the State coffers during the first six months, a surge of 20 per cent over the same period last year, and 54 per cent of the annual plan, the best performance since a major tax system reform in 1993, SAT statistics indicated.

In real, policy-adjusted terms, the growth rate was 9.7 per cent, "basically in keeping with the economic growth," Jin said.

He said China's economy has entered an era of steady growth as the government's macrocon-trol measures have taken effect, providing a substantial source for tax growth.

China's GDP expanded by an eye-catching 8.2 per cent during the first half of the year, according to statistics released by the National Statistics Bureau on Tuesday.

But tax growth was imbalanced in different regions, as inland provinces such as Yunnan, Anhui and the Inner Mongolia Autonomous Region reported slow growth or even recessions.

Overdue tax payments by businesses showed an upward trend in some regions, he said.

Jin said although economic growth is expected to maintain its momentum in the latter half of the year, the growth of tax revenue will slow down a bit as a couple of favourable tax policies are expected to exert most of their influence on the economy in the second half of the year.

A relatively higher growth in the rate of taxes paid during the latter half of 1999 will reduce the annualized growth rate of this year's corresponding period, he said.

In order to improve the efficiency of tax collections, the SAT is promoting a computerization programme nationwide, connecting computer networks and distributing specialized software.

The tax supremo said a firmer hand will be taken with tax evaders and tax loopholes will be closed.

Harsher punishments would be imposed on tax dodgers to make the cost of tax defaults more expensive than paying taxes, he said.

On a related front, Jin confirmed that the SAT was considering organizing a special armed police force to protect tax officials and to facilitate tax collection efforts.

"We are working on it," he said, declining to give further details.

A wave of violence against tax collection activities in recent years has resulted in loss of lives of tax officials.

Since 1993, hundreds of officials have been injured, and more than 20 sacrificed their lives, according to statistics from the SAT.

(China Daily)