Individual income taxation reform in China: What is the real change?

Abstract

Individual income tax (IIT) contributes to the national fiscal revenue in China, although not in such a large portion as that in more developed jurisdictions. The year 2019 saw the most significant IIT reform in China since 1994. For the first time, itemized deductions and personalized costs are taken into account in calculating the IIT liability. The schedular system is also moving to the model of integrated income. This article first summarizes, from a theoretical perspective, why and how individual income is taxed and questions whether there exists an ideal model for the IIT. From a historical perspective, it attempts to look into the reasons that triggered the latest IIT reform and considers its appropriateness in the Chinese context. In evaluating the pros and cons of the reform, this article makes reference to experiences from other relatively more mature taxation systems including Hong Kong. While the reform may help modernize the Chinese tax system, this article concludes by calling for further reforming measures.