Goodbye Agricultural Tax

‘Unfair’ farmers tax will be phased out within five years


China has taken a decisive step to gradually reduce the financial burden on farmers, thanks to the government’s promise to abolish agricultural tax.

SO SHALL YOU REAP: Cutting agricultural tax puts more money into farmers’ wallets

On March 5 at the opening of the 2004 session of the country’s top legislature—the National People’s Congress (NPC), Premier Wen Jiabao said the government would scrap the agricultural tax for good. Beginning this year, the 8.4 percent agricultural tax rate will be reduced gradually and eliminated entirely within five years.

“Though the annual agricultural tax amounts to less than 300 yuan ($36.23) per family, an insignificant amount for urban residents, it is by no means a small amount for farmers whose annual per-capita income stands at only 2,000 yuan ($241.55),” said Li Zhenya, head of the Zhuguanying Village of Luanxian County, a major grain-growing region in Hebei Province.

Today, Chinese farmers pay three major taxes—agricultural tax, tax on special farm produce and tax on slaughtering animals.

According to the No. 1 Document issued by the State Council earlier this year, the government will slash the agricultural tax rate by 1 percentage point this year and abolish taxes on special farm produce, except tobacco crops.

It is estimated that the cut of the tax by 1 percentage point this year is expected to slash the financial burden on farmers by 7 billion yuan ($845 million), and the abolition of taxes on special farm produce would reduce farmers’ financial burden by 4.8 billion yuan ($580 million).

The Third Plenary Session of the 16th Central Committee of the Communist Party of China (CPC) held last November outlined the objective to unify the urban and rural tax systems. The policies unveiled this year indicate that the country has made a key step forward in this regard.

Current Tax System Unfair

China might be the only country in the world to levy a comparatively high agricultural tax on farmers, which currently stands at an average of 8.4 percent.

PLANTING THE SEEDS OF HOPE: Slashing agricultural tax helps pull farmers out of debts

The agricultural tax includes a series of taxes levied on any collectives and individuals engaged in or obtaining incomes from farm production. Under the current system, any farming of land, no matter whether that land is barren or fertile, or the farmer rich or poor, is taxable because the land belongs to the country.

Wen Tiejun, an agricultural economist and researcher with the China Society for Economic Reform, said the system is extremely unfair for farmers. “Farmers, with or without income, 100-year-olds or newborns, have to pay the same tax,” he noted.

At present, the income gap between farmers and urban residents is still widening. The most recent statistics show that in 2003, farmers’ annual per-capita net income was 2,622 yuan ($316.67) while the annual per-capita disposable income of urban residents was about 8,500 yuan ($1,026). The volume of the agricultural tax seems small, but it still means a lot to farmers and negatively impacts the consumption and production of the over-burdened farmers.

Currently the country has different tax systems for cities and rural areas. Wang Daoshu, an official with the State Administration of Taxation (SAT), reasoned that in cities, taxes are usually levied on net profits and not on costs. That means some costs are deducted before individuals or companies are taxed. For example, city dwellers only start to pay income tax when they earn more than 800 yuan ($96.7). But in rural areas, the levy of agriculture tax, for example, is based on grain production, no matter how much farmers have invested and how much they have earned. If the tax department sets a tax threshold for farmers as they do for city dwellers, most farmers won’t need to pay taxes or would pay less.

Wang Daoshu said the importance of scrapping agricultural tax also lies in creating a unified tax system and providing farmers an equal social status as other taxpayers.

Experts also believe that abolishing agricultural tax would help reduce farm production costs and encourage farmers to enlarge grain acreage, which is of strategically significance to China’s grain security. China has a large population but limited farmland, and agricultural tax adds more pressures on farm production costs, dampening farmers’ enthusiasm in grain growing.

Wang said China lags far behind the United States, Japan and the European Union in terms of subsidizing farmers. The adoption of policies including slashing agricultural tax will directly support agricultural development.

Analysts say it is basically the right time to launch the protection mechanism on agriculture and farmers. So far, China has established a complete national economic system, with the gross domestic product (GDP) in 2003 exceeding 11 trillion yuan ($1.33 trillion), per-capita GDP topping $1,000, rural laborers reduced to 50 percent of total employees and urban residents growing to nearly 40 percent of the entire population. All these macro-economic indicators show that it is time for the industrial sector to support agriculture and the urban area to help promote development of the countryside.

Additional Reforms Needed

Experts say scrapping agricultural tax shouldn’t pose a threat to the country’s tax revenue. China’s total fiscal revenue in 2003 was 2.17 trillion yuan ($262.08 billion), a growth of 20.3 percent year on year. Of the total, agricultural tax revenue accounted for about 2.3 percent, which stood at 33.8 billion yuan ($4.08 billion).

However, the agricultural tax is an important revenue source for local governments, which have been harassed by tight budgets since the tax reform in 1994 that channeled nearly 60 percent of tax revenues to the central government coffers.

So far only Beijing and Zhejiang Province, whose governments have high financial revenues, have promised to abolish agricultural taxes this year. In some poor areas of the Chinese hinterland, agricultural taxes make up one quarter of local government revenues.

During the NPC session in early March, Finance Minister Jin Renqing said the Central Government would increase transfer payments to local governments in 2004, especially those in the central and western regions, to promote balanced development.

But Wei Jianing, an economist with the State Council Development Research Center, warned that increases in transfer payments to local governments in poorer regions cannot totally address the losses caused by the abolition of the agricultural tax.

Wei estimated that township governments in China on average carried debts of 4 million yuan ($483,000) in 2002. That figure is at least 2.1 times the average annual revenue of township governments in China. Total local government debts for the entire country, mainly owed to commercial banks, were 220 billion yuan ($26.57 billion) in 2002.

Wei said that at present there are about 16 million public servants at the township level in China relying on state finance, needing 160 billion yuan ($19.32 billion) in expenditure every year, while village-level cadres number 15 million, requiring at least 60 billion yuan ($7.25 billion) per year.

The huge debts are mainly the result of failed investment projects of local governments and the cost of supporting redundant government workers.

Unless a way is found to cut the debts of local governments and decisive measures to cut unnecessary government workers in grass-roots administrations, local governments may seek to collect money from farmers in ways other than agricultural tax, Wei said.

As a result, even after the tax is completely phased out, there is no guarantee that farmers will not be faced with new arbitrary local fees, said Li Ping, an expert on Chinese agriculture with the Rural Development Institute in Seattle.

Put Into Practice

From 2004, Beijing will scrap the agricultural tax and realize zero tax in agricultural production. The policy would reduce farmers’ annual financial burdens by about 80 million yuan ($9.66 million). That is to say, the tax on farmers in Beijing would be reduced from 27.3 yuan ($3.29) last year to almost nothing.

Last year, Beijing implemented an overall tax-to-fee reform on township financial management systems, while reducing the number of redundant townships. So far, Beijing’s townships have been reduced from 257 to 193 in number, and the number of township officials and village cadres decreased respectively by 20 and 22 percent.

Similar reforms also took place in Shanghai and Zhejiang and Jiangsu provinces from last year. Just as Xu Shanda, Deputy Director of SAT, put it: “Abolishing agricultural tax is an irreversible trend.”