China Should Brace for Higher Luxury Goods Taxes, CICC Says

(Bloomberg) — China’s plan to reform its consumption tax system is likely to entail a hike in rates on luxury goods and products that use high energy or generate significant pollution, according to analysts at state-owned investment bank China International Capital Corp. (CICC).

The changes will be focused in areas aligned with China’s goals of reaching carbon neutrality to fight climate change and common prosperity, CICC analysts led by Huang Wenjing wrote in a report.

China has been gradually widening the scope of its consumption tax in recent years, but the issue attracted market attention after the Communist Party’s Qiushi Journal last week published an August speech by President Xi Jinping. Xi called on the government to study the possibility of expanding consumption taxes as part of a push to achieve better income distribution in the economy.

“Given China’s efforts to realize common prosperity, we expect China to expand consumption tax to cover more luxury consumer goods and exclude select low-price goods,” the CICC analysts wrote. “In addition, we think that consumption tax is also likely for service consumption at select high-end entertainment venues.”

European luxury stocks have taken a knock since China began emphasizing its goal of common prosperity. They dropped again this week after Xi’s speech was published.

China’s consumption tax, with rates of less than 20% for most products, currently covers goods including tobacco, liquor, watches and luxury cars. It accounts for about 9% of overall tax revenue, according to CICC.

The investment bank’s analysts also said they expect authorities to move the collection of consumption tax from production to wholesaling or retailing. That could help redistribute tax revenues between the central and local governments and thus increase local governments’ revenue, they said.

Contact editor Bob Simison (hello@caixin.com)

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