PRC Raising Individual Income Tax Threshold

The China government recently amended the individual income tax law to raise the monthly tax exemption threshold for personal income from wage and salary from RMB2,000 to RMB3,500, effective from 1 September 2011. This has been the latest amendment to the China’s individual income tax law since 2008.

According to the amendment, levels of progressive rates applicable to the income from wage and salary will be reduced to seven levels from the current nine levels, and the range of tax rates will also be changed from currently 5%-45% to 3%-45%.

The number of salaried, wage-earning taxpayers will then be reduced from approximately 84 million currently to approximately 24 million. This amendment provides the larger benefit to the medium and low income classes than those provided in all prior amendments to the individual income tax law.

Salary earners with monthly salaries below RMB 4,545 will be exempted from individual income tax

On calculating China’s individual income tax on salary, deductions should be first made for basic pension insurance, basic medical insurance, unemployment insurance and housing provident fund, and then for the threshold of RMB 3,500. Based on the above calculation, salary earners with monthly salaries below RMB 4,545 will be exempted from individual income tax.

Progressive tax rates applicable to the income from wage and salary upon the adjustment

Progressive tax rates applicable to income from wage and salary
Level
Net Taxable Income Per Month (assessable income net of deductions and allowances)
Rate (%)
1
RMB1,500 or less
3
2
Over RMB 1,500 to RMB 4,500
10
3
Over RMB 4,500 to RMB 9,000
20
4
Over RMB 9,000 to RMB 35,000
25
5
Over RMB 35,000 to RMB 55,000
30
6
Over RMB 55,000 to RMB 80,000
35
7
Over RMB 80,000
45

High income earners shall also be subject to individual income tax as provided

The individual income tax reform will relieve the tax burden on the medium and low income classes and raises the tax levied on the high income group simultaneously. For instance, the highest tax rate is increased to 45% to include the taxable income to be taxed under the current tax rate of 40% to the tax rate of 45%.

Meanwhile, in addition to the income from wage and salary, such personal incomes as labor reward, writers’ fees, interest income, dividends and bonuses and income from transfer of property shall all be subject to individual income tax.

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