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Du Tao, a reporter from Economic Observer The "Decision of the CPC Central Committee on Further Deepening Reform and Promoting Chinese-style Modernization" (hereinafter referred to as the "Decision"), announced on July 21, proposed to promote the backward shift of the consumption tax collection link and steadily transfer it to local governments, improve the VAT refund policy and deduction chain, and optimize the sharing ratio of shared taxes. After the announcement of the "Decision", many financial and tax experts and research institutions made predictions on the consumption tax reform, with three main concerns: first, whether the consumption tax will change from a central tax to a shared tax; second, how to shift the consumption tax collection link backward, and what challenges this backward shift will bring to collection and management; third, how to expand the consumption tax base, and whether this expansion will impact the already weak domestic demand.

Consumption tax is one of the top four sources of tax revenue in China.

In 2023, China's total consumption tax revenue will be RMB 1.6 trillion, accounting for about 8.9% of the country's tax revenue and 1.6% of the nominal tax revenue.GDPConsumption tax is also the only tax type among the four major taxes that will grow in the first half of 2024.

A local fiscal budget department director suggested changing the consumption tax from a central tax to a shared tax. He predicted that the consumption tax reform would continue the previous tax reform ideas, that is, to ensure the stock and adjust the increment. The stock will still be a central tax, while the increment will be adjusted to a shared tax. However, to verify the stock, the consumption tax base needs to be recalculated, and the higher authorities have not taken any action yet.

Since its introduction in 1994, consumption tax has undergone three rounds of adjustments in 2006, 2008 and 2014, mainly to adjust the tax rates of some categories and expand the tax base. A tax-sharing reform plan released by the State Council in 2019 released the reform ideas of shifting the collection of consumption tax to a later stage, expanding the tax base, and sharing the incremental tax.

This reform plan has not been implemented in the past five years. Article 20 of the "Consumption Tax Law of the People's Republic of China (Draft for Comments)" (hereinafter referred to as the "Draft for Comments"), which was publicly solicited for comments in 2020, involves the promotion of the consumption tax reform pilot. In 2024, the law is expected to be submitted to the Standing Committee of the National People's Congress for deliberation.

Wang Zhenyu, director of the Institute of Local Finance at Liaoning University, said that the consumption tax reform has been delayed because it faces many constraints.

First, it is limited by the technical means of tax collection and management. In the process of transferring from the production end to the consumption end, the taxable groups have undergone a huge change in small and scattered areas, which may lead to the loss of tax sources.

The second is the consideration of the existing vested interests between the central and local governments. Under the logical framework of "base + growth", this is a very difficult problem.

Third, the consumption tax, which is worth trillions of yuan, constitutes an important support for current fiscal transfer payments. Compared with the transfer payments worth trillions of yuan, local governments will not feel too much benefit from the consumption tax-sharing reform.

Wang Zhenyu said that the consumption tax under discussion at present is strictly a special consumption tax, which is limited to a few specific tax items such as gasoline, tobacco, and alcohol. Some of the industries covered by these tax items are also facing adjustments. For example, under the substitution effect of new energy vehicles, it is highly likely that the gasoline consumption tax will be reduced. Therefore, it is recommended to learn from the practices of mature economies and study the introduction of a general consumption tax, that is, a retail tax, as a local tax.

Reform ideas

Consumption tax is a general term for various taxes that are levied on the turnover of consumer goods. It is a tax levied by the government on consumer goods. The collection process is single, and most of them are paid at the production or import stage. Consumption tax is a typical indirect tax, which is a price-included tax. It exists as part of the product price and the tax is ultimately borne by consumers. The "Consumption Tax Items and Tax Rates Table" shows that there are 15 tax items for China's consumption tax, with tax rates ranging from 1% to 56%. The first is consumer goods that affect the ecological environment, such as cars, motorcycles, refined oil, car tires, wooden disposable chopsticks, firecrackers, fireworks, and solid wood floors. The second is consumer goods that are not good for health due to excessive consumption, such as tobacco and alcohol. The third is luxury consumer goods that are consumed by a small number of high-income groups, such as golf balls and golf clubs, yachts, high-end watches, and jewelry and jade.

Data from the 2023 China Tax Yearbook shows that the main sources of domestic consumption tax in 2022Secondary Industry, mainly tobacco products industry; wine, beverage and refined tea manufacturing industry; petroleum, coal and other fuel processing industry; automobile manufacturing industry; wholesale industry, etc. In terms of regions, consumption tax revenue mainly comes from Guangdong, Shanghai, Shandong, Jiangsu, Yunnan and other places.

Different from the general consumption tax levied by some economies, China's consumption tax has been used as a connection and supplement to the value-added tax since its inception, and has a regulatory effect on consumer behavior.

The book "China's Fiscal and Tax Reform in the Past Thirty Years" edited by Liu Keguo and Jia Kang mentioned that since the VAT only has two tax rates, the original tax burden is basically maintained, and special adjustments are made to some consumer goods, so a few consumer goods are selected to levy a consumption tax on top of the VAT. Liu Keguo was the director of the Tax Policy Department of the Ministry of Finance, and Jia Kang was the director of the Institute of Fiscal Science of the Ministry of Finance.

The book introduces that Liu Zhongli, then Minister of Finance, used tobacco and alcohol as examples to illustrate the relationship between value-added tax and consumption tax: "Originally, the tax rates for tobacco, alcohol, and cosmetics are very high. If you only charge 17%, what should you do? So you add consumption tax as a supplement. Consumption tax is a central tax. Why is it a central tax? Because we need to restrict the development of these industries. We need to reduce tobacco and alcohol. After we increase the tax revenue, the central government will pay the tax, and local governments will not be motivated. Why should business tax be paid to local governments? The bulk of value-added tax is still paid by the central government. The purpose is to encourage local governments to reduce industry and develop more service industries. So this tax reform has a bit of industrial restructuring meaning."

The first consumption tax levied in 1994 included 11 tax items: tobacco, wine and alcohol, cosmetics, skin and hair care products, precious jewelry and gems, firecrackers and fireworks, gasoline, diesel, car tires, motorcycles, and cars. For the Chinese at that time, these goods were basically luxury goods and were not within the scope of the country's encouragement of consumption.

Since then, the reform of consumption tax has basically been carried out within the scope of adjusting tax rates and expanding the tax base, reflecting this idea of ​​regulating specific consumption.

In 2006, the consumption tax underwent its first major adjustment, with new tax items such as golf balls and golf clubs, high-end watches, yachts, wooden disposable chopsticks, and solid wood floors. At the same time, gasoline and diesel were incorporated into the tax items of refined oils, and high-end cosmetics were listed separately, while a large range of tax items for skin care and hair care products were cancelled.

In 2013, the Third Plenary Session of the 18th CPC Central Committee proposed the requirement of "adjusting the scope, links and tax rates of consumption tax collection, and including high-energy-consuming, high-polluting products and some high-end consumer goods in the scope of collection". In June 2014, the Overall Plan for Deepening the Reform of the Fiscal and Taxation System approved by the Political Bureau of the CPC Central Committee determined to "adjust the scope of collection, optimize the tax rate structure, improve the collection links, and enhance the regulatory function of consumption tax". In the same year, the automobile tire tax item was cancelled; continuing this idea, batteries and coatings were included in the consumption tax items in 2015. Since then, the consumption tax items have stabilized at 15.

The new round of consumption tax reform ideas emerged in 2019. The "Reform Promotion Plan for Adjusting the Division of Central and Local Revenues after Implementing Larger-Scale Tax and Fee Reductions" (hereinafter referred to as the "Plan") issued in 2019 proposed that, in accordance with the requirements of the reform of the local tax system, some of the current consumption tax items levied at the production (import) stage will be gradually transferred to the wholesale or retail stage for collection under the premise of controllable collection and management, so as to expand local revenue sources and guide local governments to improve the consumption environment. The base of the stock part of the reform adjustment will be determined and remitted to the central government by the local government, and the incremental part will belong to the local government in principle, ensuring the stability of the existing financial structure between the central and local governments.

The plan does not set a specific timetable for the reform, but it does set out a path for the reform: specific adjustment items will be implemented steadily after full demonstration and approval item by item. First, reform will be implemented on items such as high-end watches, precious jewelry, and gemstones where conditions are ripe, and then reform pilot projects will be implemented on other qualified items in conjunction with consumption tax legislation.

In December 2019, the Draft for Comments was made public. Article 20 states that "the State Council may implement a pilot reform of consumption tax, adjust the tax items, tax rates and collection links of consumption tax, and submit the pilot plan to the Standing Committee of the National People's Congress for record."

The explanation of the draft for comments also mentioned that, according to the needs of consumption tax reform, a transitional clause should be set in the consumption tax law. In accordance with the relevant requirements of the Party Central Committee and the State Council on improving the local tax system and the reform of the division of central and local revenues, the consumption tax reform work such as shifting the collection of some consumer goods to the later stage of consumption tax has been advancing. Considering that these works will continue after the legislation of consumption tax, it is necessary to authorize the State Council to organize and carry out relevant pilot projects in accordance with the law.

According to the "Legislative Work Plan of the State Council for 2024" announced on May 6, 2024, the draft Consumption Tax Law is ready to be submitted to the Standing Committee of the National People's Congress for deliberation.

On July 31, Wang Dongwei, Vice Minister of the Ministry of Finance, said at a press conference held by the State Council Information Office that among the current large-scale taxes, consumption tax is entirely levied by the central government and is mainly levied at the production and import stages. In the next step, we will consider moving the collection of consumption tax to a later stage and steadily delegating it to local governments, taking into account factors such as the division of central and local revenues and tax collection and management capabilities, and steadily implement it by item and step, expand local revenue sources, and guide local governments to improve the consumption environment.

Luo Zhiheng, chief economist of Guangdong Securities, told the Economic Observer that tax reform must be coordinated with the development of the macroeconomic situation and should be carried out according to the times and circumstances. Looking back at previous economic and social reforms, successful reforms are the result of gradual progress and weighing the pros and cons of all parties, and tax reform is no exception. Promoting consumption tax reform is not just a matter of tax reform, but also requires consideration of:

First, changes in the collection process have placed higher demands on collection and management capabilities.

Second, we must fully consider the changes in the financial structure of the central and local governments, and solve local financial difficulties without causing a decline in the central government's macro-control capabilities.

Third, the transfer of consumption tax to local governments may involve changes in local behavior. Since the main sources of consumption tax are tobacco, alcohol, oil and vehicles, whether it will encourage local governments to promote consumers to expand consumption of tobacco, alcohol and oil must be considered in advance.

Move back and expand

The idea behind consumption tax reform is to shift collection to a later stage and expand the tax base.

A tax expert told the Economic Observer that consumption tax is generally levied at the production, wholesale, retail and import stages. In practice, most of the levies are levied at the production stage; a small number of tax items are levied at the production and wholesale stages, such as tobacco; alcohol is levied between the production and sales companies, which can be counted as the production stage; gold and silver jewelry are levied at the retail stage.

Shifting the collection link backward means moving the main collection link of consumption tax from the production link to the wholesale and retail link.

Li Hua, director of the Tax and Economic Research Center of Shandong University, said that the first problem faced by the shift of consumption tax collection to a later stage is the consumption of collection and management capabilities. If it is shifted to a later stage, the difficulty of collecting and managing consumer goods such as tobacco and alcohol will increase significantly; the second problem is that there will be an imbalance between regions. If the consumption tax is allocated to local governments, it will aggravate the imbalance of local financial resources.

The 2023 China Tax Yearbook shows that the top ten provinces and cities in terms of consumption tax revenue in 2022 are: Guangdong Province, Shanghai, Shandong Province, Jiangsu Province, Hubei Province, Hunan Province, Sichuan Province, Guizhou Province, Liaoning Province, and Shaanxi Province.

The shift of consumption tax collection to a later stage will lead to a shift in tax collection from the "principle of production" to the "principle of consumption". Galaxy Securities released the "Strategic Implications of Consumption Tax Reform - Prospective Series of the Third Plenary Session of the 18th CPC Central Committee Reform", which stated that the "shifting" of consumption tax will have a negative contribution to the tax amount of major tobacco, alcohol, automobile and oil production and processing provinces such as Shanghai, Guizhou, Yunnan, Hubei and Hunan, but a positive contribution to the tax amount of major population and consumption provinces such as Guangdong, Shandong, Henan and Zhejiang.

The above-mentioned tax professionals believe that it is impossible to shift all consumption taxes to the retail sector. There are a large number of individual businesses that are subject to tax assessment in the retail sector, which violates the principle of priority in terms of the allocation of tax collection and management forces.

The person believes that different industries may adopt different collection methods. For example, tobacco may be collected later at the link between wholesale and terminal sales, and the tobacco company will withhold and pay on behalf of the seller, because tobacco is subject to a monopoly system; the collection link of alcohol is unlikely to change; oil collection may be moved to the wholesale link; cars are most likely to be moved to the retail link, and can be collected together with the car purchase tax.

In addition to the postponement of collection, the expansion of consumption tax has also attracted much attention. According to the above-mentioned "Plan", the increase belongs to the category of tax sharing, which can enhance local financial resources.

Luo Zhiheng said that from a longer-term perspective, the expansion of consumption tax is conducive to green development and promoting common prosperity. It is necessary to expand the scope to high-end services, such as high-end clubs and hotels, as well as high-pollution and high-energy-consuming industries. The collection of consumption tax in these industries has little impact on ordinary consumers. Therefore, we cannot generalize the expansion of consumption tax and the promotion of consumption. We should return to the essence of China's consumption tax: consumption tax is levied on specific behaviors and tax items, not on all consumption behaviors. To stimulate consumption, it is ultimately necessary to rely on the coordinated efforts of improving residents' income levels, improving social security levels, and improving the quality of product and service supply.

A previous research report by Jiang Zhen, an associate researcher at the Fiscal and Taxation Research Center of the Chinese Academy of Social Sciences, showed that the consumption tax category can be expanded to include high-standard, high-energy-consuming, and high-polluting products, such as private aircraft, high-end fur products, high-end luggage, mahogany furniture, and non-degradable packaging. Some high-end lifestyle services, high-energy-consuming, and high-polluting service products can also be considered for inclusion in the scope of consumption tax collection, such as high-end performances and other cultural and entertainment products, high-endHealthcare ServicesThe Decision also proposes to "implement fiscal, taxation, financial, investment, price policies and standard systems that support green and low-carbon development, and improve the green tax system."

Strengthening local financial resources

In 1993, when the tax-sharing reform was still under discussion in China, the idea of ​​levying consumption tax was opposed by some provinces with large tobacco and alcohol production. According to the reform idea at that time, 100% of the incremental consumption tax was collected by the central government, which was undoubtedly a "loss" for the provinces with large tobacco and alcohol production. However, the consumption tax that was finally implemented in 1994 was still determined to be a central tax.

Thirty years later, with local fiscal revenue under pressure and the central and local fiscal powers and responsibilities being readjusted, the idea of ​​tax sharing for consumption tax has been put on the agenda. Both the 2019 "Plan" and the 2024 "Decision" reveal the idea of ​​expanding local tax sources and increasing local independent financial resources. The "Plan" proposes that the base of the stock part of the reform and adjustment will be determined by the local government and the incremental part will in principle belong to the local government, ensuring the stability of the existing financial structure between the central and local governments.

This means that, under the premise of setting the base for consumption tax, the central government will maintain the base and the incremental tax revenue will belong to the local governments.

However, it is still uncertain whether the consumption tax reform will continue the ideas of the 2019 plan. The above-mentioned tax professionals believe that there are still two possibilities for the reform of the consumption tax system. One possibility is to share all taxes, and the other possibility is to share taxes by tax item. Under the premise of maintaining the stability of the overall macro tax burden, the consumption tax reform may be more inclined to the stock reform between taxes, and to make structural adjustments and optimizations in the stock. In the long run, the consumption tax will expand, but it will also gradually change according to consumption habits and the stage of economic development, and the expansion range cannot be too wide. Moreover, the current commodity trading link also levies value-added tax. If it is expanded on a large scale, it will also face the problem of double taxation.

Yuan Haixia, president of China Chengxin International Research Institute, believes that from the perspective of financial support and tax collection efficiency, the local tax system based on shared taxes should be continued at this stage, but the local share ratio should be appropriately increased to ensure the stability and sustainability of local financial resources. Promote the backward transfer of consumption tax collection and steadily transfer it to local governments. At present, consumption tax accounts for about 9% of national tax revenue, second only to domestic value-added tax and income tax. The backward transfer of collection will further expand the tax base and give full play to its function of raising fiscal revenue. Steady transfer to local governments will help expand local revenue sources and promote local economic development.

The director of a county finance bureau with a petrochemical industry in its jurisdiction told the Economic Observer that if the consumption tax becomes a shared tax, it will have a significant incremental effect on the local finances of the "tobacco, alcohol, oil and vehicle" industries in its jurisdiction.

The above report released by Galaxy Securities estimates that if all tax collection links in the consumption tax reform are moved back and transferred to local governments at a ratio of 50%, the tax revenue of provinces in the eastern, central, western and northeastern regions will increase by 330.8 billion yuan, 156 billion yuan, 159.3 billion yuan and 50 billion yuan respectively. The absolute value of tax transfer in the eastern region is relatively large mainly because of its large consumption volume. The consumption expenditure of tobacco and alcohol in the 10 eastern provinces accounts for 49.4% of the national proportion, the consumption of refined oil accounts for 42.8%, and the consumption of automobiles accounts for 51.1%.