China validated a new consumption tax policy on April 1 that levies higher taxes on luxury goods such as yachts and limousines, as well as wooden disposable chopsticks and wooden flooring. This marked the most profound change in the consumption tax since 1994 and is thought to be the first step in an overall tax reform in the country.
　　Consumer tariffs, which are handed over to state coffers, consist of excise taxes and the taxes on imported goods collected by customs agencies.
　　The consumption tax has been an obscure concept to most Chinese, since it is included in the prices of products. But the changes this time are drawing public attention.
　　While the country’s economy is booming, contributing to the overall improvement in people’s living conditions, China is faced with such severe problems as a deteriorating ecosystem, tight energy supplies and a widening gap between the rich and the poor. It is in this context that the tax adjustment is believed to “protect the environment and save energy” and “help the poor by taxing the rich.”
　　According to the Ministry of Finance, there are two highlights to the tax adjustment: One is to promote China’s environmental protection and resource conservation and the other is to provide guides for rational consumption and income redistribution.
　　But will this produce the desired results? The impact of the change on market prices is already evident in some areas. As an instinctive reaction to this tax, manufacturers have in fact already begun passing on the increasing costs to consumers. Almost all the commodities and sectors, where the consumption tax rates were raised, have reported price hikes.
　　
　　Vehicle tax seen most significant
　　
　　The rise of the vehicle excise duty is considered the most prominent change. Industry insiders commented that it conforms to the government stand of encouraging the use of small-engine cars and discouraging those that are less environment friendly.
　　While the tax rates for cars with an emission discharge volume below 2.0 liters remain unchanged or are slightly reduced, those for cars above the mark have been raised in line with the principle of the greater the emission volume, the larger the tax rate, with a ceiling of 20 percent. For example, the tax rate on 3.0L-4.0L cars is lifted from 8 percent to 15 percent.
　　The adjustment led to a sharp rise in prices of big-engine BMWs in Beijing and Shanghai before it formally took effect, with the biggest increase of 150,000 yuan.
　　To offset the impact of the consumption tax adjustment, according to market analysts, manufacturers of upscale commodities may have no alternative but to raise prices.
　　However, Eichhorn, sales manager of FAW-VW Audi, expressed his confidence in China’s limousine market. He said he believes market demand and manufacturers’ ability to meet that demand are the deciding factors. In his opinion, the increase in consumption tax rates and the rise in fuel prices will not deal a heavy blow to the market.
　　Before April 1, when the new consumption tax policy was to take effect, the sale of luxury watches soared throughout China, because, according to the new tax policy, a 20 percent tax rate would be imposed on watches costing more than 10,000 yuan.
　　In 2005, Switzerland’s watch exports to China increased by 25.7 percent over the previous year, topping $270 million. According to Swatch, the company is trying to adapt to changes in the Chinese market. Although China’s new taxation policy may lead to falling sales, said a company spokesman, Swatch will try to make up for this loss by adding more middle-end watches to its deliveries in China.
　　Alan Grieve, spokesman of Richemont, Switzerland’s largest luxury brand holding company, is cautious about China’s new consumption tax policy, saying it was too early to judge the impact. Nevertheless, he declared that the importance of the Chinese market would not be shaken.
　　Richemont respected the decision of the Chinese Government and it was time to prove the company’s adaptability to the new policy environment, Grieve said.
　　At the China International Boat Show 2006 in early April, quite a few participants expressed their concern over the negative influence on China’s nascent yacht market caused by the additional 10 percent tax rate on yachts. The large profit margin in China is quite attractive to overseas yacht dealers. French participants in the show said they would try to explore the market for non-fossil-fuel-powered yachts, which are excluded from the additional taxes.
　　
　　Guideline for industrial development
　　
　　Sale of wooden flooring also soared before April 1. A 5 percent consumption tax was imposed on this product, resulting in a 10 percent increase in cost and a price rise of 10-20 yuan per square meter. This will further widen the gap between the costs of wooden flooring and laminated flooring.
　　According to official statistics, in China, every year more than 85 million cubic meters of lumber is used for flooring. An additional 10 million cubic meters goes to produce disposable chopsticks, and another 6 million cubic meters is used in wooden chopsticks exported to other countries. However, the added consumption taxes on these items are not thought to be high enough to curb the waste of timber resources in China.
　　Consumption taxes on average skin and hair care products have been scrapped, but some high-priced products have been included in the category of cosmetic items on which the consumption tax is imposed.
　　The reactions of cosmetics companies, however, varied. L’Oreal, for example, refused to make comments on the change, while Estee Lauder said it was considering raising its prices to ease the pressure from the increased tax rates.
　　In the decade since it began taxation on consumption, China has witnessed quite rapid growth in revenues in this regard, rising from 51.6 billion yuan in 1994 to 163.4 billion yuan in 2005.
　　Experts agreed that the most recent adjustment of the consumption tax policy can be regarded a guideline for China’s industrial restructuring, which encourages environment friendly, energy-saving industries and those of high added value.
　　“It reflects the transformation of the economy to a sustainable development mode by crystallizing such a guiding principle in two aspects,” said Gao Huiqing, a researcher at the State Information Center. “One is to raise the tax rate on energy-consuming or energy-intensive products like disposable chopsticks, and the other is to encourage the development of energy-saving products through a reduction in the tax rate, such as on small-engine cars.”
　　In light of the state strategy of developing a cyclic economy, according to Gao, the new consumption tax policy is expected to boost emerging hi-tech and service industries.
　　
　　Change in consumption patterns?
　　
　　At the same time, it is believed, through levying high consumption tax on high-priced commodities, the government hopes to guide people’s consumption and adjust income redistribution in an indirect way, so as to narrow the expanding disparity between the rich and the poor.
　　Statistics show that annual sales of luxury products in China currently amount to about $2 billion. According to a research report by Ernst & Young LLP, by 2008, the growth rate of sales of these products will reach 20 percent, and then fall to about 10 percent till 2015. By the end of this period, sales are expected to exceed $11.5 billion, accounting for 29 percent of the total sales of luxury products worldwide.
　　Although some think this is an overestimation of the Chinese purchasing power, it is clear that the booming economy has nurtured a noveau riche class in China, which is quite interested in golf, yachts, limousines and luxury watches.
　　Nevertheless, China is still home to 30 million farmers who live below the poverty line. In 2005, while the average per-capita disposable income of urban residents hit 10,493 yuan, the per-capita net income in the rural areas was only 3,255 yuan. In this sense, a luxury watch may cost many years’ or even a lifetime’s income for a farmer.
　　As it requires the rich to pay extra money for conspicuous consumption, the new tax policy is expected to promote social equality to some degree.
　　Zhao Hangsheng, a professor at the School of Economics of Zhejiang University, however, contended that while the tax policy overhaul aims to optimize the redistribution of wealth, a number of rich people just do not care about the prices of luxury products. In his view, the government needs to take various measures to solve the increasing disparity between the rich and the poor.
　　Some also complained it is regrettable that expensive houses, furniture and entertainment activities were excluded from the consumption tax list, since the amount of money spent on a luxurious home far exceeds that spent on golf balls and clubs, for example.
　　The purchase of townhouse or villa, especially mass purchase, may be regarded as a kind of conspicuous consumption, and the exclusion of such items will weaken the function of this new policy, they argued.
　　The fact that the consumption tax is imposed on disposable chopsticks rather than high-end furniture is also cited to demonstrate that the consumption tax policy adjustment was ill-designed. According to proponents of this opinion, if the 5 percent tax rate on disposable chopsticks is expected to raise people’s awareness of environmental protection and energy conservation, it would be more effective to levy taxes on furniture, as the 1.3 million cubic meters of wood used annually for chopsticks pales compared with that used for furniture.
　　
　　Consumption Tax in China
　　
　　The taxation on consumption in China may be considered to date back to 1949, the year of the founding of the People’s Republic of China, when taxes on entertainment, feasts, cold food and hotels were incorporated into one excise tax.
　　The Interim Regulations on Excise Tax were formally promulgated in January 1951. According to the regulations, the excise tax was paid by consumers and collected by business operators on behalf of the government. A 25 percent tax was imposed on fees charged by cinemas, theaters, dance halls, amusement parks, acrobatic theaters and other entertainment venues.
　　In 1953, China revised its industrial and commercial tax system, which integrated taxes on feasts, cold food, hotels and dance halls into the business tax. Taxes on cinemas and theaters were merged into an entertainment tax, which continued until 1966.
　　In 1984, China carried out a nationwide tax reform, in which the original industrial and commercial tax was divided into a sales tax, value-added tax, product tax, salt tax and others.
　　In the 1994 reform, the product tax, a major part of the industrial and commercial tax, was replaced by the value-added tax. As the benchmark value-added tax rate was only 17 percent, tax revenues were sharply reduced. It is in this context that the consumption tax was adopted and imposed on some goods that used to be subject to high product tax.
　　

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