The State Administration of Taxation, China's top tax authority, has told local tax authorities to thoroughly investigate alleged tax evasion by top celebrities in the film and television industry after an online post exposed the co-existence of "yin and yang" contracts in the entertainment sector. Many celebrities sign two contracts－one real with the real (higher) amount they receive, and the other with a lower payment and perks which they use to evade paying the due tax.

According to China's taxation laws, individual income tax (IIT) is deducted from the salary of employees by the employers and paid to the government. But the tax levied on the entertainment industry, including celebrities, is different from IIT for salaried people, because the service contracts in the sector could involve payments of dozens of millions of yuan.

One of the reasons some individuals intentionally or unintentionally evade tax is the lack of sufficient knowledge of the taxation laws. Especially those some celebrities who earn huge amounts and have big fan following should realize the importance of paying the due tax and never evade tax.

The problem is that "yin and yang" contracts are not uncommon; they are used even in the real estate sector, which should prompt the tax authorities to strictly enforce the taxation laws. The administrative authorities, on their part, should educate the people about the importance of paying the right amount of tax in time and warn them that intentional tax evasion is a crime, for which they will be punished. This will help the public better understand and respect taxation laws and regulations.

It may take some time to establish a comprehensive IIT system, for which not only the efforts of the tax department but also the cooperation of other departments are required.

According to the general direction of individual income tax reform, an IIT mechanism that combines comprehensive and classified taxation systems is likely to be gradually introduced.

The system of imposing different amounts of tax on people earning the same amount of money simply because their income channels are different should be changed. For instance, salary income and remuneration for labor are both labor income, but different tax rates are imposed on them in many cases. This is unfair for people whose only source of income is remuneration for labor.

For the time being, the authorities could accelerate the merger of different kinds of income for labor, such as salaries and remuneration for labor, to collect tax using the same method.

In the future, tax will be levied based on household income and the tax authorities could grant some special tax deductions for expenditure on children's education and eldercare. In the next stage of the reform, the highest and lowest tax rates for IIT are expected to be reduced, which will boost the economy, and reduce the tax burden of the high-income group.

Taxpayers should be made more aware of the taxation laws. Now big data have made it easier to identify some hidden sources of individuals' income. And in the future, the tax authorities are expected to use personal identification card numbers to trace more hidden sources of individuals' income.

Since it has become easier for the tax authorities to know a taxpayer's actual income, it is becoming increasingly difficult for people to evade tax.

So it's time the taxpayers realized that paying tax according to the law is not only in their own long-term interest, but also will help build a harmonious relationship between the tax authorities and the taxpayers.

The author is chief economist with the China Academy of New Supply-side Economics.