Against all odds, a government mobile app launched in early 2019 in China has risen in popularity among netizens. Although it has nothing to do with fun or leisure, the app is nevertheless closely linked to everyone's wallet. Developed by the State Administration of Taxation, all employees can now declare their information via the app to receive tax deductions on their individual earnings.

The information to be provided concerns six expenditures: children's education, continuing education, medical treatment for serious illnesses, home loan interest, rent and care for the elderly.

Father of two, Chen Xin has to repay his mortgage every month. Once his information was validated by the application, the 35-year-old computer scientist living in Beijing quickly made the calculation: Thanks to the latest amendment of the Individual Income Tax Law, he now only has to pay 700 yuan ($104) tax on his monthly salary of 20,000 yuan ($2,960), compared to 2,870 yuan ($425) before the reform.

Tax relief, especially for low-to-medium income earners like Chen, is what the Central Government targeted with this seventh amendment to the law since it first came into effect in 1980.

Raise the threshold

In fact, since October 1, 2018, the amended Individual Income Tax Law has been partially implemented. One of the obvious aspects of this amendment is raising the tax exemption threshold from 3,500 yuan ($518) to 5,000 yuan ($740) per month or 60,000 yuan ($8,880) per year. This is the fourth time that the exemption threshold has been raised in China. The last adjustment took place eight years ago in 2011, when it went from 2,000 yuan ($296) to 3,500 yuan.

Deputy Minister of Finance Cheng Lihua indicated that after the increase of the tax exemption threshold to 5,000 yuan, 44 percent of the urban taxable labor force do not need to pay individual income tax any more, against 15 percent previously. According to statistics published by the Ministry of Human Resources and Social Security, until the end of 2017, there were 425 million urban workers. This means that the number of taxpayers among them will decrease from 187 million to 64 million. In other words, with the raising of the tax exemption threshold, more than 100 million people will be exempt.

Individual income tax is China's third largest tax revenue, after value-added tax and corporate tax. In 2017, China collected nearly 1.2 trillion yuan ($178 billion) in individual income tax, or about 8.3 percent of its total tax revenue. With the increase in the exemption threshold, the deputy minister predicts a decrease of 320 billion yuan ($47.49 billion) per year from government revenue.

Improve tax equality

Prior to this reform, increasing the tax exemption threshold has always been considered as one of the only tools to optimize income redistribution. However, the recent amendment added deductions for special expenses, such as care for the elderly and children's education, which are important daily expenses for the population.

"The state should not base tax on nominal income, but on disposable income," said Tian Zhiwei, Vice Dean of the Institute of Public Policy and Governance at the Shanghai University of Finance and Economics.

The case of computer scientist Chen and his gross salary of 20,000 yuan breaks down as follows: Every month, he pays off 8,000 yuan ($1,184) on his mortgage, 2,000 yuan for his children's education, and 1,000 yuan ($148) for social insurance. His remaining salary is 9,000 yuan ($1,332). According to the scale preceding the tax reform, Chen paid 2,870 yuan ($425) in individual income tax. In contrast, an employee whose gross salary is 10,000 yuan ($1,480) only had to pay 545 yuan ($81) in tax. Justifiably, Chen felt aggrieved.

Fortunately, with the adoption of the new amendment, people whose salary is between 5,000 yuan and 20,000 yuan a month will benefit from a 50-percent reduction in their taxes. Those whose salary is between 20,000 yuan and 80,000 yuan will see a 10- to 50-percent reduction in their taxes.

"Income tax reform is mainly good news for low-income people, as they will benefit from a bigger drop in their taxes," said Tian.

As Minister of Finance Liu Kun explained, "The new specific additional deductions are conducive to improving tax equality, thus allowing taxation to play a better role in adjusting the distribution of

income."

(Comments to lixiaoyu@chinafrica.cn)

Tax Threshold Deductions for Specific Expenses

The new tax threshold deduction measures came into effect with the amended Individual Income Tax Law as of January 1, 2019.

Here are the specific rules:

• Education of children A deduction of 1,000 yuan ($148) monthly from the taxable income of parents for each child from attending kindergarten to studying for a doctorate, including those in technical education.

• Continuing education A deduction of 400 yuan ($59) per month for a maximum of 48 months for diploma education, or a deduction of 3,600 yuan ($533) in total in the case of a qualification training.

• Serious illness A deduction on taxable income per year from remaining medical expenses after payment by medical insurance, between 15,000 and 80,000 yuan ($2,200 and $11,840).

• Mortgages A deduction of 1,000 yuan per month from taxable income for taxpayers or their spouses who have mortgages for first-time home purchase.

Rents. A deduction of rents, up to 18,000 yuan ($2,664) per year, will be granted to taxpayers who have no housing in the city where they work.

• Single child taxpayer A deduction of up to 2,000 yuan per month from the taxable income of a single-child taxpayer whose parent is over 60 years of age. Members of the same siblings can share this deduction quota of 2,000 yuan.