Table of Content
2 Development of Property Tax System in China
3 Possible Impact of Changes In the Real Estate Tax
The recent financial crisis had an effect not only on the United States and Europe but on the whole world. China was not an exception. The crisis caused a dramatic increase of real estate prices in China over recent years. The reason was the desire to improve living standards by many Chinese citizens from one hand, and the investment opportunities and speculation from the other hand, with the large amounts of “hot money” flowing into the Chinese capital market.
Speculators were buying properties in order to invest their capital. Then, they are holding them without leasing or landing for a certain amount of time,. The idea is to create a shortage of supply on a market in order to earn from the increase of price on the real estate market. State Grid Corporation of China (Pheny & Wong, 2011) performed a survey in 660 cities and found that 65.4 million of residential properties had not consumed any electricity in the past six months. That shows the scale of the real estate investments. The source of increase of the property prices is too much money supply (Bin, 2011). Of course, the huge supply of money was necessary to rescue the economy during the global financial crisis of 2009-2010, but it has also driven speculation.
There are many tools that the government can use to contain property price bubbles. One of them is a decrease of the money supply (Bin, 2011). The other tool is a change (increase) of the real estate tax in order to contain the growth of property prices. The Chinese government reconsidered the plan discussed in the Third Plenary Session of the 16th Central Committee of Communist Party of China (CPC) held in October 2003 to reform the tax system on properties and, as a result, to protect the real estate market from a possible bubble.
In order to better understand the changes in the Real Estate Tax System in China, it’s development and current situation will be discussed in chapter 2. Chapter 3 will discuss the possible impact on introducing the new real estate tax.
2 Development of Property Tax System in China
Chinese tax system was reformed several times. Currently, there are 19 types of taxes in China: Value-Added Tax (VAT), Consumption Tax, Business Tax, Corporate Income Tax, Individual Income Tax, Resource Tax, Urban Land Use Tax, House Property Tax, City Maintenance and Construction Tax, Farmland Occupation Tax, Land Appreciation Tax, Vehicle Purchase Tax, Tax on Vehicles and Boat Operation, Tax on Ship Tonnage, Stamp Tax, Deed Tax, Tobacco Leaf Tax, Tariffs, and Fixed Assets Investment Direction Regulating Tax.
Out of 19 tax types, 16 taxes are placed under the management of regional and county local taxation bureau. The remaining three (i.e. Tariffs, Tax on Ship Tonnage, VAT on imported goods and consumption tax on imported goods) are collected by the customs (Pheny & Wong, 2011).
The tax revenues in China can go to the central government, local governments or can be shared between the two. Transactions of property development and dealings are taxed by the local government. According to the revised Property Law which came into effect on October 1, 2007, China’s Constitution distinguishes clearly between land and buildings/fixtures located on land. In China, urban land is owned by the Central government. Rural land is owned by “Rural Cooperatives” and is only allowed to be used for restrictive purposes such as farming, and residences for farmers, schools, and hospitals. Where the Rural Cooperatives seek to convert the land for purposes other than those specified, the land first has to be transferred to the local government. Though the land is owned by the state and cannot be sold, the right to use it can be transferred for a Land Grant Fee (Pheny & Wong, 2011). Under current Chinese law, the real estate developer and the person/family who buys real estate has right to the land for 70 years. In the end of the contract, the land on which the building is built, needs to go back to the government. However, the right to lease the land can be extended after the end of the term (Bin, 2011).
As one can notice from the table below, the current framework of China's real estate taxation system applies to real estate during the stages of development, transfer, holding, and tenancy. The idea of having four phases is not a commonly used concept in the Western world.
- Quote paper
- Tomasz Wilczak (Author), 2011, Real Estate Tax in China, Munich, GRIN Verlag, https://www.grin.com/document/180219