10 Juli 2018, 14:09 GMT
The property sector has been an important pillar to China’s economy in the past two decades. Recently property tax law was a key point of discussion during the National People’s Congress (NPC) meetings over the past week or so. What is certain is the government’s intention to forge ahead with this new initiative. While uncertainties remain around when and how the tax law will be implemented, it will surely have a meaningful impact on the sector and the country’s economy down the road.
You'd have to have been living on the moon for the last two years to be unaware of China’s property sector boom. It has attracted a lot of interest from investors, as well as debt-laden local governments in China. The latter see an opportunity to plug their fiscal deficits whilst cooling a booming property sector. One way to do so would be changing how property tax is being imposed.
Currently, China's property tax is levied under administrative regulation and not legislative regulation, i.e. there are no laws in China which enforce property tax. But operationally this was never a problem as taxes are imposed on property developments and sales mostly at a corporate level and on a transaction basis. To broaden this income base, the government can start taxing ownership of residential property at the individual level, which will be harder to carry out without proper legislative infrastructure. Hence enacting a property tax law that redefines the composition of property tax is the first step forward.
When will the new tax law be effective?
Both the NPC and its standing committee have the legislative power to get the changes enacted. But a bill needs to go through a lengthy process first: drafting, submission, deliberation, voting, and promulgation. Both the drafting and deliberating phase require public opinion solicitation and consideration, and there are three rounds for the deliberation phase alone. We are currently at the stage where the Budgetary Affairs Commission of the NPC standing committee and Ministry of Finance (MoF) are jointly drafting the bill. No public opinion solicitation has taken place yet.
If history serves as a reference, we are unlikely to see a property tax bill pass legislation until the second half of 2019 at the earliest. Compound this with the enormity of the task in terms of data and infrastructure required for implementation - and one can see this process taking even longer. Further complications include lack of housing census surveys, nationwide transaction monitoring platform and a comprehensive housing registration system.
How will it look?
Real estate is one of the highest-taxed sectors in China. As at year end 2015, the macro tax burden ratio (tax revenue/GDP) for the real estate sector was 40%, compared with a national average of 18%. As mentioned, existing tax levies are targeting activities around property development and property sales, with ownership of residential properties exempted. It is likely, therefore, that we will see some reduction in the tax burden on property development and sales, and some redistribution to residential ownership.
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