China has decided to set 1,600 yuan (US$197) per month as the new threshold above which residents must pay personal income tax, raising the cut-off from 800 yuan (US$99).

The outcome, as expected, was approved by members of the Standing Committee of the 10th National People's Congress yesterday afternoon. It marks a significant step in China's personal income taxation reform program.

The tax was initiated in 1980, when the country's residents had just started to accumulate personal wealth as China was stepping out of an equal-for-all society. The current cut-off level of 800 yuan was set in 1993, since when the national economic and personal income landscapes have undergone profound changes.

The new cut-off is in line with these changes as average income has been on the rise continually and dramatically.

The expanding rich-poor income gap has aroused widespread concern, and hopes are pinned on personal income taxation playing a larger role in balancing out the disparity.

Researchers agree the bulk of personal income tax revenue is contributed by low and medium-income earners, which goes against the intentions of legislators - to make use of the law to promote social harmony.

It is hard to determine what the ideal cut-off level for personal income tax should be, although consensus has been reached among the people and legislators that it has to be raised.

At least the democratic procedures (a public hearing was, for the first time, held on the draft amendment to a law) in the legislation process ensure the new threshold is widely accepted by the public.

The new legislative move is a step forward towards a more fair taxation system. But it is only the first step and we still have a long way to go before a mature system is established.

Based on the new threshold, ordinary income earners should be paying less tax. But the same old problem - the rich often taking advantage of loopholes in tax collection to dodge payments - will not be solved simply by raising the cut-off standard.

Legislators and tax officials need to figure out more effective methods to tackle this scourge.

The universal cut-off arrangement does not take into consideration the individual conditions of tax-payers. The financial burdens on different earners, in terms of supporting their families, are varied and it is valid to apply differential terms by taking into account housing, education and medical care expenditures, which, in many cases, have to be shouldered by individuals.

Such a detailed taxation arrangement is certainly not possible right now, but it should be the direction in which personal income tax reform proceeds.

Personal income tax is but a part of the overall taxation system. To promote social fairness, other follow-up decisions need to be made to balance out income gaps.

Property tax, gift tax and inheritance tax can play a role in this respect. People remain divided on whether the taxes suit the realities of Chinese society, but preliminary discussions should be encouraged so that a public consensus can be reached earlier rather than later.

China's personal income tax accounts for only 6.75 percent of its total tax revenues, but the proportion has been growing quickly in recent years and is set to become a major taxation tool.

Given its increasing weight, more reforms need to follow to keep the tax in line with social changes, and to promote the interests of the majority of the people.

(China Daily October 28, 2005)