Deepak Luintel

China’s legislature has approved an increase in the individual income tax free threshold to RMB 3500 for Chinese nationals and a new streamlined schedule of tax brackets, down from nine to seven. The new rates will come into effect from September 1st.

Foreigners will also be subject to the new rates; however, the tax free threshold for foreign workers will remain at RMB 4800.

The lowest tax bracket will be reduced from 5 to 3 percent and will cover a larger number of workers in a move widely viewed as a reaction to public concerns over inflation and rising food prices. Inflation has proven a sore political issue in China with accelerating rates responsible for keeping real deposit rates negative. China’s May CPI rose 5.5% year on year, outpacing a one-year deposit rate of 3.25%.

New Individual Income Tax Rates from September 1st 2011.

Tax Grade Monthly Taxble income Rate 1 RMB=<1500 3% 2 1500<RMB=<4500 10% 3 4500<RMB=<9000 20% 4 9000<RMB=<35000 25% 5 35000<RMB=<55000 30% 6 55000<RMB=<80000 35% 7 RMB>80000 45%

The new threshold comes after an initial draft proposal of RMB 3000 was withdrawn following a public consultation period that saw the revised figure criticized as too low. The percentage of income earners paying individual income tax drop from 28 to 7.7 percent, reducing government tax revenue by around RMB 160 billion per year.