With the contradiction between local fiscal revenue and expenditure increasing, and a new round of fiscal and taxation reforms on the horizon, the trillion-level consumption tax reform has attracted much attention.

The direction of consumption tax reform has long been clear. The "14th Five-Year Plan" requires the adjustment and optimization of the scope and rate of consumption tax collection, and the promotion of the backward transfer of collection links and the steady transfer to local governments.

Several fiscal and taxation experts told China Business News that the consumption tax reform in the new round of fiscal and taxation reforms will also continue this general direction. In order to give full play to the regulatory role of consumption tax, some high-energy-consuming, high-pollution products and some high-end consumer goods will be included in the collection scope, and the collection links of some tax items will be moved from the production link to the wholesale and retail links. At the same time, in order to improve the local tax system, alleviate local fiscal difficulties, and encourage local governments to optimize the consumption environment, the consumption tax part of the central tax will be gradually transferred to local governments, but it is not appropriate to have too high expectations in the short term.

Highlight 1: Expansion of consumption tax

The recent two incidents of enterprises paying back consumption tax, coupled with the expectation of a new round of fiscal and taxation reforms, have made consumption tax reform highly concerned. Consumption tax is not levied on all goods, but on special consumer goods. These consumer goods are specifically divided into 15 tax items, among which the revenue from four tax items, namely tobacco, refined oil, automobiles and alcohol, accounts for more than 90% of the consumption tax revenue.

The purpose of levying consumption tax is to curb the consumption of goods such as high pollution, high energy consumption, non-renewable resources, and luxury goods, guide healthy and green consumption, and raise fiscal revenue.

According to data from the Ministry of Finance, consumption tax revenue has generally shown an upward trend in recent years. In 2023, China's consumption tax revenue will be about 1.61 trillion yuan, making it the third largest tax category in China. In the first five months of 2024, China's consumption tax revenue was about 0.76 trillion yuan, a year-on-year increase of 7.2%. At present, consumption tax is a central tax category, and the revenue belongs to the central finance.

Several financial and tax experts told Caixin that the new round of fiscal and tax reforms will continue the previous direction of consumption tax reform and complete the reform tasks that have not yet been completed. For example, in 2013, the scope, links and tax rates of consumption tax collection were adjusted to include high-energy-consuming, high-polluting products and some high-end consumer goods in the collection scope. Therefore, some high-energy-consuming, high-polluting products and high-end consumer goods are expected to be included in the scope of consumption tax collection in the future.

In recent years, except for alcohol, small-displacement motorcycles, ordinary cosmetics, etc., which are no longer subject to consumption tax, the consumption tax reform is mainly to expand the scope of taxation and increase the tax rate. For example, in 2014, the consumption tax rate on refined oil was raised three times; in 2015, the consumption tax rate on cigarettes was greatly increased, and batteries and coatings were included in the tax scope; in 2016, a 10% consumption tax was imposed on super luxury cars; in 2022, consumption tax will be imposed on e-cigarettes; in 2023, the consumption tax on refined oil will be expanded.

Experts have different views on how to expand the scope of consumption tax in the future.

Research by Jiang Zhen, associate researcher at the Institute of Finance and Economics Strategy of the Chinese Academy of Social Sciences, shows that the expansion of consumption tax can include high-standard, high-energy-consuming, and high-polluting products, such as private aircraft, high-end fur products, high-end luggage, mahogany furniture, and non-degradable packaging. Some high-end life services, high-energy-consuming, and high-polluting service products can also be considered to be included in the scope of consumption tax collection, such as cultural and entertainment products such as golf and high-end performances, high-end medical and health care service products, high-end sauna baths, racing and other high-end sports.

Yin Lei, a professor at the Tax Cadre College of the State Administration of Taxation, and others wrote an article suggesting that consumption tax should be levied on products that are not conducive to ecological protection, such as disposable plastic products, chemical reagents, pesticides, and phosphorus-containing laundry detergents. Luxury consumer goods such as mahogany furniture, valuable luggage, antique calligraphy and paintings, jade articles, valuable supplements, and private aircraft should be included in the scope of collection. Products that are harmful to human health, such as betel nuts, should be included in the scope of collection. High-end consumer services such as equestrianism, luxury cruise tourism, presidential suite accommodation, high-end business cabins, and high-end club entertainment and leisure should be included in the scope of collection.

From the actual reform measures in recent years, the expansion of consumption tax or the increase in tax rates still focus on the four major tax items of tobacco, alcohol, oil and cars, which also plays a more obvious role in the growth of consumption tax revenue.

Highlight 2: The collection link is moved back

At present, most tax items of consumption tax are levied at the production link. In the future, the collection link will be moved back to the wholesale and retail links, which will be a major highlight of consumption tax reform.

The "Notice on Issuing and Implementing the Reform and Promotion Plan for Adjusting the Division of Central and Local Revenues after Large-Scale Tax and Fee Reductions" (hereinafter referred to as the "Notice") published by the State Council in 2019 clearly stated for the first time that the collection link of consumption tax will be moved back and steadily transferred to local governments.

The "Notice" stated that in accordance with the requirements of the reform of the sound local tax system, under the premise of controllable collection and management, some of the current consumption tax items levied at the production (import) link will be gradually moved back to the wholesale or retail link to expand local revenue sources and guide local governments to improve the consumption environment. The specific adjustment items have been fully demonstrated and steadily implemented after approval item by item.

The Notice clearly states that reforms will be implemented first for high-end watches, precious jewelry, and jewelry and jade, and then reform pilot projects will be implemented for other qualified items in combination with consumption tax legislation. The base of the stock part of the reform adjustment will be determined by the local government, and the incremental part will be transferred to the local government in principle to ensure the stability of the existing financial structure between the central and local governments. The specific measures will be studied and formulated by the Ministry of Finance in conjunction with the State Administration of Taxation and other departments.

Since 2019, there has been no actual action on the reform of shifting the collection of consumption tax to the back and gradually delegating it to local governments.

When talking about the new round of fiscal and tax reforms at the end of last year, Jia Rong'e, director of the Tax Policy Department of the Ministry of Finance, said that efforts should be made to promote consumption tax reform and steadily move the collection of consumption tax to the back.

Several local tax officials said that from the perspective of tax collection and management alone, tax items such as tobacco, alcohol, oil and vehicles are already qualified. The question is what impact the shift of the collection link will have on local fiscal revenue.

The China Galaxy Securities Research Institute found that under the current collection method, the eastern provinces contributed more consumption tax, accounting for nearly 40%. The western region was second, accounting for about 28.5%. The consumption tax revenue in the central and northeastern regions accounted for about 16.8% and 7.8% respectively. The consumption tax was moved from the collection stage to wholesale or retail, and the corresponding consumption tax revenue was also transferred from the tax authorities in the production and processing locations to the tax authorities in the wholesale and retail locations. In terms of absolute scale, the provinces with large consumption and population received more tax sources.

According to the calculation of the Galaxy Securities Research Institute, if the consumption tax reform is calculated based on the statistical data of tobacco, alcohol, oil and vehicle consumption in each province, and it is assumed that the collection stage of the above consumption tax items is moved to the wholesale and retail stage, and at the same time, it is decentralized to the local governments according to the "5:5" ratio between the central government and the local governments, the tax revenue of the provinces in the eastern, central, western and northeastern regions will increase by 330.8 billion yuan, 156 billion yuan, 159.3 billion yuan and 50 billion yuan respectively. Among them, the total consumption of the main consumption tax objects in the 10 eastern provinces accounts for about 50% of China's total consumption, which also makes the eastern provinces obtain the largest absolute consumption tax revenue.

Of course, this is only an estimate of the central government's transfer of half of the consumption tax revenue to local governments. Due to the substantial reduction in central consumption tax revenue, if other methods are not taken to make up for the reduction in revenue, the scale of central transfer payments to local governments will inevitably be reduced, and the transfer payments are mainly given to the underdeveloped areas in the central and western regions. Therefore, how the actual financial resources obtained by various places will eventually change is more complicated.

It is based on this consideration that in order to avoid the negative impact of the backward transfer of consumption tax collection and the transfer to local governments, the above-mentioned "Notice" requires that the collection link be shifted backward to focus on small tax items such as high-end watches, and the transfer of revenue to local governments will not affect the stock, but only the incremental amount, and ensure the stability of the existing financial structure between the central and local governments.

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