Analysts at Standard Chartered point out that the Chinese Ministry of Finance (MoF) released the special deduction plan for the newly revised Individual Income Tax (IIT) law to seek public opinion before it is enforced in 2019.
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“This is the first time that China has added a list of special deductions in its IIT system, including the cost of children’s education, continuing education for adults, treatment of serious diseases, elderly care, mortgage interest (for first-home buyers) and rent payments.”
“We assess that the special deductions would be equivalent to another CNY 2,000-3,000 of standard deductions per month. This could reduce the number of IIT taxpayers as a proportion of the urban employed population to 5%, from 15% without the special deductions, and from 44% before this round of IIT reform.”
“The additional special deductions could reduce the household tax burden by CNY 100-130bn on an annual basis, according to our estimate. We expect the total tax reduction due to this round of IIT reform at about CNY 465-487bn (40% of IIT revenue in 2017).”
“This should help to curb downside risk to the economy and cushion it against external shocks. We estimate that the whole package could boost consumption by 0.32-0.34ppt of GDP, up from our previous estimate of 0.26ppt without special deductions.”
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