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By Xin Zhiming (China Daily)
Updated: 2007-07-26 08:48

An official from the taxation administration has clarified that the new 5 percent tax on interest income will also apply to foreign depositors holding money in Chinese banks.

China has levied a 20 percent tax on deposit interest income since 1999, but allowed a preferential rate - 15, 10 or 7.5 percent for depositors from other countries - as a result of agreements with those countries.

On Friday, the government decided to cut the 20 percent tax rate to 5 percent starting from August 15. The new rate will also apply to those who enjoyed the preferential rates, Liu Lijian, an official from the income taxation section of the State Administration of Taxation, said on a live Internet conference.

China included the interest income tax in its income tax regime in 1950, but did not levy it until 1999, when policymakers started using it in the hope of driving money out of banks to jazz up weak domestic demand.

The tax rate has been adjusted down to "properly add to people's deposit interest earnings" as consumer prices rise, said Wang Jianfan, an official from the Ministry of Finance.

He said that from the perspective of fair taxation, interest income from deposits held by the poor should enjoy a differential rate, but it's still not feasible given the "various constraints".

Since the computer systems of banks have not been wholly interconnected and cannot grasp the overall income information of an individual, for example, a depositor may evade taxes by opening several small accounts if such a progressive taxation system is put in place, Wang said. "The policy can be improved in the future when conditions are ripe."

Deposit interest income tax has long been blamed for hurting the poor. Many economists have forecast that it will be abolished sooner or later.

But Liu Shangxi, deputy director of the Research Institute for Fiscal Science, Ministry of Finance, does not agree.

The tax is on returns from capital, he told China Daily. While people's income from labor is taxed, their capital gains should also be subject to income tax, he said