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China's personal income tax rate is unlikely to change this year, despite a recent report by a government think-tank calling for immediate, massive tax reform.

The Fiscal Science Research Institute (FSRI) - the Ministry of Finance's sole think-tank - recently completed a report focusing on the reformation of China's fiscal and tax systems.

The report, based on a comprehensive study on distribution of Chinese residents' incomes, urges the central government to revamp its "out-of-date" personal income tax policy.

"The threshold on individuals' income taxes should be raised to 1,200 yuan (US$145)," said Bai Jingming, leader of the report's research team.

The team worked on the report for a year.

"Preferential tax incentives should be given to middle-class income earners," Bai said.

The present threshold, 800 yuan (US$96.68) a month, was introduced in the early 1980s, when most Chinese residents earned less than 100 yuan (US$12.08) per month.

Tax rates on monthly incomes ranging from 3,000 yuan (US$362.54) to 5,000 yuan (US$604.23) are comparatively high, Bai said.

"This has conflicted with the central government's repeatedly stressed policy to cultivate the country's middle class," Bai added.

"Lowering tax rates imposed on this group of residents is necessary to stimulate overall consumption and spur economic growth."

The report advocates raising high wage earners' - including business executives and celebrities, whose monthly incomes generally exceed 10,000 yuan (US$1,208.45) - income taxes.

The report recommends the government levy a heritage tax and impose tax liabilities on private home owners.

"This could, in a way, prevent high income earners from evading taxes by transferring their cash incomes into assets," the report suggests.

Government officials and tax experts suggest dramatic changes to personal income taxes are unlikely this year.

"The government is indeed considering revamping the income tax policies concerning individuals," said an official with the Taxation Policy Department under the Ministry of Finance.

"But there is no possibility of an immediate change, especially on the legislative level."

Yang Chongchun, head of the China Taxation Association and a member of the Chinese People's Political Consultative Conference's National Committee, told China Business Weekly an amendment to the current individual income tax law is "inevitable."

However, Yang added, more discussion is needed.

"A dispute remains as to whether the government should use a single, standard nationwide system, or if varying schemes should be imposed geographically," Yang said.

Given the wide disparity in economic development between eastern and western China, the central government will likely allow provincial tax bureaux to adopt different tax schemes, Yang predicted.

Tax authorities and legislators have encountered difficulties in selecting an appropriate tax-collection model, Yang said.

Under current tax rules - contained in the Individual Income Tax Law implemented in 1994 - Chinese residents must pay taxes separately on different sources of income.

Meanwhile, most Western countries levy personal income taxes based on the combined sources of an individual's income.

"China will eventually follow international standards of collecting individual income taxes," Yang said.

"But the country needs more time to adjust."

Unlike developed countries, in which a person's income records can be easily tracked, China has a comparatively backward banking-information system.

That, Yang noted, has made it hard for Chinese authorities to calculate an individual's real income.

Yang Zhiqing, a tax expert with the Central University of Finance and Economics, argues personal income tax rates should "vary according to the levels of regional economic development."

He told China Business Weekly tax reform would be placed on the back burner this year as authorities have another Herculean task to deal with.

"The government is putting enormous effort into formulating and implementing tax incentives to contain the negative effects caused of the SARS (severe acute respiratory syndrome) outbreak," Yang Zhiqing said.

"The continued proactive fiscal policy this year will also rely on a stable tax system to ensure adequate fiscal income."

State Administration of Taxation figures indicate the amount of personal income tax collected in China last year soared to more than 100 billion yuan (US$12.08 billion) from 7.27 billion yuan (US$876 billion) in 1994.

Personal income tax makes up a comparatively small part of China's overall tax revenues. In developed countries, personal income tax is usually the nations' largest tax source.

The income gap between China's rich and poor has widened over the last 10 years, as the Gini index - an international measure used to gauge income distribution - has soared to 0.458 in 2000.

That was almost double the 1991 level of 0.28, indicates the report.

The most recent figure is above the international warning line of 0.4. It also indicates China suffers from income distribution inequality, the report suggests.

China has introduced since the end of last year a series of measures to crack down on tax evaders.

Beijing's tax authorities, for example, issued last November tentaive measures that specified strict tax reporting and filing procedures for individuals earning more than 100,000 yuan a year.

Personal income taxes under current rules, based on progressive rates, range from 5 per cent to 45 per cent.

When calculating taxes, individuals are allowed to claim flat deductions of 800 yuan (US$96.60) per month.

The current threshold for individuals is 1,000 yuan (US$120.80) in Beijing, 1,500 yuan (US$181.27) in Shenzhen and 1,200 yuan (US$145) in Shanghai.

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