China looks to spread property tax net

Fitted with every trapping money can buy, urban Chinese homes tend to swing between Victorian England, colonial American or a confounding mix of Tuscan and futuristic. Equally uncertain and inchoate are the laws dealing with China's gargantuan property sector, especially its tax laws.

But now in a radical move, almost akin to re-introduction of private property, China is spreading its hugely unpopular property tax net, a bold step forward in its market liberalisation process which will require it to build new institutions and systems such as land and property registration, more sophisticated tax machinery and stronger private ownership laws.

One year ago, the Chinese government took the unprecedented step of launching a property tax experiment to dampen skyrocketing real estate prices. The two mega cities of Shanghai and Chongqing were selected as the trial centre for introducing property tax, but in a limited manner, applicable only to some luxury homes. The two cities tried out different models, with Chongqing taxing pre-existing as well as new properties and Shanghai raising tax only on properties purchased after January 28, 2011. The annual tax rate, ranging between 0.4 per cent to 1.2 per cent of the purchase price, was described as nominal and largely symbolic, but it has set a permanent precedence for China.

Structure

The National Development and Reform Commission now intends to extend the tax structure to other cities this year. The next major testing ground is likely to be Beijing, followed by the prosperous coastal provinces of Jiangsu, Shangdong, Guangdong and Zhejiang.

Strangely, the most recalcitrant segment in China's new experiment are not just house-owners, but local governments. While multiple agencies are involved in setting up the tax system — including the finance ministry, state administration of taxation and the ministry of housing and urban-rural development — it all comes down to the provincial administrations whose interests are totally in conflict with a tax system.

As of now, roughly a third of the purchase price of a home goes to the local government as land cost, a one-time transaction tax and an annual bill for property maintenance. The income accrued from these deals are so massive that local officials have little interest in raising revenue through taxes. To illustrate: Chongqing raised only 100 million yuan (Dh58 million) from property tax in 2011, against 82 billion yuan it made from land sales.

Shanghai raised 300 million yuan in taxes versus 151 billion yuan through land sales. Many experts fear that officials in competing provinces may decline to implement property tax at all or will end up offering artificially low rates to attract more investors and buyers.

These fears were exacerbated when taxes did manage to cool down the market in the two trial cities, with number of real estate transactions going down. In Chongqing, the sale of high-end property fell 4.1 per cent year-on-year in the nine months of 2011, causing panic among provinces which are next in line. However, central policymakers feel that local administrations will be forced to end their addiction to land sales, as taxes are the only sustainable option for a more consistent form of revenue. Given that land is a finite resource, revenue from its sale and leasing can go only so far.

But there are seemingly insurmountable problems ahead in building a tax-mature state. Provincial authorities point out several hurdles towards implementing an effective tax administration — lack of unified planning in deciding on tax categories, over-centralised directives from Beijing and dearth of trained personnel.

Calculating tax rates remain the most challenging task as experts argue over whether it should be levied on sale price or an evaluated price — something logistically impossible to determine in China's dynamic and irrational market. Secondly, collection of tax requires a massive administrative infrastructure and personnel capable of assessing property values.

This requires millions of professional appraisers — and developing this generation of specialists seems to be a very long term task for the government.

The writer is a freelance journalist based in China.