China to roll out five-year property tax pilot in some regions

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China’s top legislature said the country will roll out a pilot scheme of property tax in selected regions, as part of a wider “common prosperity” programme to enhance housing affordability and tame runaway prices.

The State Council, the country’s Cabinet, will select the first regions and decide on other details of the pilot, according to the official Xinhua News Agency.

The tax will apply to residential and non-residential property as well as land and property owners, but does not apply to legally owned rural landor where residences are built on it, Xinhua said.

The pilot will last for five years from the issue of the details, before the National People’s Congress (NPC) turns it into a nationwide law, it said.

The Ministry of Finance and the State Taxation Administration will draft the relevant measures and regulations for supporting the pilot programme, it added.

The idea of a levy on home owners first surfaced in 2003 but has failed to take off due to concerns that it would damage property demand, home prices, household wealth and future real estate projects. It has faced resistance from stakeholders including local governments, who fear it would erode property values or trigger a market sell-off.

Local authorities of Shanghai and Chongqing, two of the most populous and wealthiest municipalities in China, were authorised by the central government in 2011 to collect taxes on real estate within their jurisdictions, part of a plan to curb rising prices. A new government team that took over under Xi Jinping’s presidency a year later deferred the idea of expanding the pilot, according to state media, citing technical difficulties.

Efforts to revive the tax began anew in May, as housing prices kept rising despite a slew of administrative measures across the nation to curb speculation.

The effort took on extra urgency when Xi defined for the first time what “common prosperity” means during an August meeting of China’s economic leaders: favourable changes in taxes and social security payments for middle income earners, policies that increase earnings for low-income groups and crackdowns on practices and loopholes that may give rise to “illicit income.”

Previous property tax pilot programs only applied to houses, but the latest one will cover state-owned land for construction purposes, Yan Yuejin, research director at Shanghai-based E-house China R&D Institute, said on Sunday.

The wealthy province of Zhejiang, tech hub Shenzhen and the southern island province of Hainan which is developing free trade businesses are expected to join the pilot program, Yan said. 

“Zhejiang province, in particular its capital city of Hangzhou, is very likely to be included in the program as the province is aiming to building itself into a pilot zone for common prosperity by 2025, so it would have good foundation and demonstration effect to be included in the trial,” he said.

Hangzhou, the base of e-commerce giant Alibaba, is China’s eighth-richest city, with economic output reaching 1.61 trillion yuan ($252 billion) last year, about 70 per cent of Hong Kong’s GDP.

Citic Securities said in a note on Monday that the cities of Shanghai, Chongqing and Shenzhen as well as Hainan province are expected to be included in the first batch of regions for the property tax pilot.

In the short run, the introduction of property tax will bring down home prices in some big cities, said Lian Ping, head of Zhixin Investment Research Institute, adding that some owners with multiple houses already started selling properties in recent days.

“Selling properties on a large scale will not happen in China, as most people buy houses for residential uses instead of speculation,” Lian noted, predicting the property tax would be rolled out with a “mild force and less rigid rules” to ensure there would be little negative impact on China’s economy.  

The pilot program is not a crackdown on China’s real estate market amid the ongoing Evergrande debt crisis, said. Tian Yun, former vice director of the Beijing Economic Operation Association. “It would be more proper to understand the property tax pilot program from the perspective of guarding against systemic financial risks, making improvements to achieve common prosperity and equal distribution,” he said.