Caixin
Jan 21, 2015 05:20 PM

Gov't Must Bring Tax Matters above Board

On January 13, the consumption tax on gas and related products was raised from 1.40 yuan per liter to 1.52 yuan, while that on diesel and jet fuel increased from 1.10 yuan to 1.20 yuan. This was the third time in two months China has raised the consumption tax on oil products – the most aggressive action taken since tax reform started in 2009.

Every tax adjustment so far has ignited a flurry of debate. Many people are worried about the tax burden, and also raise questions about how the tax revenues will be used. These are valid concerns. But we should also question the legality of how tax matters are decided.

Indeed, the controversy over tax increases underlines the importance of hastening efforts to regulate taxation. Changes to the tax rate must be enacted by law, under the purview of the National People's Congress (NPC).

But, as things stand, the flaws of the current system cannot be ignored. Take the recent tax rises. In the last three rounds of adjustments, an announcement was jointly made by the Ministry of Finance and the State Administration of Taxation. Each time, spokespeople from both agencies addressed questions about the reasons for the raise and how the additional revenues will be used, behaving as if they were at a press briefing. Yet, none of them have bothered to address questions about the legality of the tax increase.

Some experts said the two departments acted according to law, and the tax rises were above board. They cited the second article of the Provisional Regulations on Consumption Tax, which says: "Any adjustments to the consumption-tax taxable items and tax rates shall be determined by the State Council."

As this rule points out, the State Council has been vested with the power to decide on the tax amount.

However, article 10 of the Law on Legislation says: "The decision of such an authorization shall define the purpose and scope of authorization. The organ being authorized shall exercise the authority strictly according to the purpose and scope of authorization. The organ being authorized may not transfer the authority to any other organ."

In the last two rounds of increases, for example, the joint notice by the finance ministry and tax administration made no mention of State Council approval, which violates the procedures.

The people, through their representatives in the legislature, are who should decide what items should be taxed, how to do it and by how much. This is a hallmark of a democracy. There can be no argument that such powers rightfully belong to the NPC.

Thus, at the third plenum of the 18th Central Committee, China's top leaders pledged to regulate how taxes are set and collected, and stressed that fiscal management is an important pillar of a country's governance. Today, they are also calling for the improvement of the rule of law. One by one, the conditions for reform are being put in place.

To change the system, we must first understand it. The State Council's powers on tax matters stem from a 1985 NPC decision authorizing the State Council to "formulate interim provisions or regulations concerning the reform of the economic structure and the opening-up policy." This briefly worded resolution has been the basis for many of the State Council's regulations over the past three decades, even though the resolution itself made clear that this was to be a temporary arrangement.

To be sure, the NPC decision was necessary in its time. China was then in the early stages of its economic reform and faced many new and complex problems that needed quick action, demands that the still maturing NPC and its Standing Committee could not meet.

Today, however, market development is a firm feature of the Chinese economy. In the current stage of its comprehensive reform, the goal is to rationalize governance to make it more systematic and efficient. It's high time we reconsider government powers that are vague and broadly defined.

Only a handful of taxes, including corporate and personal income tax, are regulated by the NPC. The rest, including the value-added tax and consumption tax, are the province of State Council decisions.

In recent years, many delegates to the NPC and the Chinese People's Political Consultative Conference have proposed revoking the 1985 authorization. Invariably, they are told that while such a proposal is reasonable, "more study is needed."

Change can be gradual, but it has to start somewhere. First, more limits can be placed on State Council regulations, requiring them to be more specific. Second, all new taxes should be passed by the NPC. Third, speed up efforts to withdraw the authorization.

Tax matters are a great concern of all citizens, and a tax system must be just and above board. Only then can taxpayers' rights be safeguarded and China's governance improve.

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