Tax plan to slash housing prices
By Xu Dashan (China Daily)
Updated: 2004-03-15 11:00

High housing prices have often shattered the dreams of many ordinary Chinese people wanting to buy decent private homes to improve their living conditions.

But a new tax plan could soon give them hope.

The government is considering imposing a unified real estate tax, which experts say will help slash present housing prices by as much as 50 per cent.

At this time, a land leasing system for real estate development is in place in China, under which home owners can enjoy land use rights for between 50 and 70 years.

But home buyers have to pay all taxes and fees at once, including land leasing fees, because developers have turned these taxes and fees into housing costs.

Current high housing prices are mainly a result of these heavy taxes and fees.

A 60-square-metre apartment unit is worth an average of at least 360,000 yuan (US$43,373) in Beijing, which is more than 10 times the average annual income of an ordinary family.

But in foreign countries, the price of a housing unit is usually no more six times the annual income of a family.

International practices suggest that the cost of construction accounts for about 72 per cent of the total housing price, while land costs, taxes and profits account for the remaining 28 per cent.

But in China, spending on construction accounts for 42 per cent of the housing price, while land leasing fees, profits, as well as other taxes and fees, account for 58 per cent.

In some cities, developers will have to pay as many as 200 types of taxes and fees to the local government.

Meng Xiaosu, president of the China Real Estate Development Group, said the existing land system does not comply with market rules, which has created chaos on the real estate market.

Encouraged by hefty returns from land-leasing, local governments are approving as much land as possible for real estate development leaving no more land available for future use.

That means governments will not gain any income from land they continue to own.

Some developers, eager to earn more profits, also take advantage of the land system to evade taxes.

A recent investigation into 10 major developers in Nanjing, in East China's Jiangsu Province, found that all of them had evaded taxes.

"It is irrational to collect those taxes and fees at one time," Meng said.

He added that he proposed the idea of levying a unified real estate tax to replace the present tax and fee collection system a long time ago.

But it was not until last October that the government formalized the idea in a report to the Third Plenary Session of the 16th Central Committee of the Chinese Communist Party.

"The government would carry out a tax and fee reform in urban construction," the report reads.

"If conditions are ripe, the government would start levying a unified and regularized real estate tax and abolish relative fees."

Finance Minister Jin Renqing and State Administration of Taxation Director Xie Xuren have spoken about the plan on numerous occasions.

Establishing a unified real estate tax system and abolishing some taxes and fees related to real estate development is a priority for local taxation departments, though nothing has been finalized, said an official with the administration.

The idea is that the total amount of real estate tax burden should be no more than taxes and fees collected today, the official said.

Zhang Peisen, a senior researcher with the Taxation Research Institute, said the unified real estate tax is designed to replace existing taxes and fees including the urban real estate tax, land use tax, land value-added tax and land leasing fees.

Under the new system, home buyers would not be required to pay those taxes and fees which developers add to the cost of buying a home at one time.

"They are only required to pay the annual tax based on the value of the houses until the value of the home is paid up," he said.

Liu Huan, a professor at the Central University of Finance and Economics, said the real estate tax is an important component of the proposed property tax system.

China's commodity related tax system and income tax system are relatively mature, he said, but the property tax system lags behind.

A modern tax system should include a commodity tax, income tax and property tax system, he said.

"The levying of the real estate tax would signal the beginning of the establishment of the country's property tax system," Liu said.

Under the new system, local governments would have stable tax sources and housing purchases would be stimulated.

However, other experts say the new tax system would increase the financial burden on home owners during the time the house is utilized.

They will not only be required to pay real estate management fees, daily spending on gas, water and electricity, but also real estate taxes, one expert said.

The burden is great, especially for low-income families, he added.

Liu Weixin, an analyst with the China Society of Urban Economics, says the government which gives key emphasis on improving people's standard of living, would consider to levy the lowest real estate tax on families which own only one home.

As a type of property tax , this tax would help narrow the gap between rich and poor, he said.

In a time of quick economic growth, the real estate tax is aimed at curbing speculation, he said.

Real estate development in some areas has overheated and some people have also profited immensely in the past few years.

For example, a private company director in Fuzhou, capital of East China's Fujian Provinces, bought 28 housing units and earned more than 5 million yuan (US$602,409) within two years.

If the government turns a blind eye to this type of behaviour, the income gap between rich and poor will become wider. The behaviour would also lead to other serious social problems, Liu said.

But provisions to protect those with lower incomes have been included. The new tax plan is expected to mainly target owners of more than one home, Liu said.

It would also target luxury home owners, he added.

"The higher the value of your home, the more tax you have to pay," he said.

Developers are not worried about the effects of the proposed tax since some say it could either help reduce developers' capital pressure for real estate development, while others say pressure is not that heavy, because developers have already shifted the financial burden to buyers.

But experts agree that the tax would have an impact on what type of homes developers plan to build.

The attraction of building large homes and luxury homes will be reduced because of tax burden, one expert predicted.

Developers will also have to pay taxes if their homes are not sold, the expert said. "It will force developers to beef up sales."

An official with the Ministry of Finance said that the government is still studying the issue of levying the real estate tax.

"The government is bound to levy the tax when the conditions are ripe," the official said.

Earlier reports said South China's Guangdong Province was likely to implement the tax on a trial basis this year.

Analysts say the tax should be implemented as soon as possible as the impact is likely to be positive, though technical issues need to be resolved before the government can do so.

These difficulties include how to supervise individual accounts and how to identify people's first home.

Also, an efficient property evaluation system is not in place to place a value on a home and, in turn, outline the fee to pay.