ZHU Fuchang, an employee in a local transportation company, first heard of individual income tax in 1996, on a pay day when he found some of his 900 yuan (US$108) salary was missing.

It took almost the whole morning for the accountant in his company to explain to him how individual income tax was levied and that the lost money had gone to the public purse, even though the tax had already existed in China for more than a decade by that time.

Zhu now earns some 1,000 yuan (US$120) each month and pays 10 yuan each month as income tax, the equivalent of one day's living expense for himself.

"Nine hundred yuan was a handsome salary in the early 1990s, and more useful than my current salary, which has lagged far behind soaring prices," said Zhu.

Zhu may be able to expect a little more money each month by the end of this year, if the central government revamps its two-decades-old individual income tax system by raising the amount of the standard deduction.

According to a recently reported proposal, the government will raise the current monthly deduction threshold of 800 yuan (US$96.70) to 1,200 yuan (US$145), with local governments being entitled to raise or lower the threshold by up to 20 per cent according to their price levels, the Beijing News reports. The proposal will be reviewed in the National People's Congress in August.

Tax evolution

China's current Individual Income Tax Law was put into effect in 1980 but few paid attention to it for a long time, because the average monthly income for wage-earners was well below 100 yuan (US$12) at that time.

The law has been revised twice - in 1993 and 1999 - to cover income from savings interest and share dividends, while the initial 800-yuan deduction threshold remained unchanged.

"Besides redistributing social wealth, one major function of tax is to increase tax revenue for the government," said Zhu Weiqun, a public finance scholar from the Shanghai University of Finance and Economy.

Over the past 25 years, the amount of individual income tax collected exploded as the average income of urban residents, especially those in developed cities such as Shanghai, Beijing and Guangzhou, soared. The revenue raised from the tax rose from 160,000 yuan (US$19,347) in 1980 to 173.7 billion yuan (US$21 billion) in 2004, according to statistics from the State Administration of Taxation. Individual income tax accounted for 6.75 per cent of the country's total tax revenue in 2004, the fourth largest tax revenue stream.

"The threshold of the tax should be levered up at the same pace as the increase in residents' income, " said Xu Xiaofeng, professor from the Public Economics School, adding that local residents' expenses for housing, medical care, education and social security have surged over the years.

According to official statistics, average per-capita disposable income per month reached 1,390 yuan (US$US$168) in Shanghai in 2004, which indicates those earning 800 yuan a month in the city live in poverty.

Some cities have raised the deduction threshold on individual income tax in recent years. Beijing increased the threshold to 1,000 yuan in 1999 and to 1,200 in 2003. In Guangzhou and Shenzhen, it has risen to 1,600 yuan (US$193).

After the adjustments, revenue from individual income tax continued its growth momentum in those cities, said Xu.

"The move not only alleviated residents' unwillingness to pay tax but also spared the authorities energy spent inspecting high-income individuals."

Other issues

Besides raising the threshold of the tax, some analysts suggest more adjustments should be made to improve the fairness of the current individual income tax system.

The latest statistics from the State Administration of Taxation show that 65 per cent of the nation's individual income tax is collected from ordinary wager-earners, rather than the nation's wealthy.

"The individual income tax system mainly focuses on salary, while proving less effective in tapping money obtained beyond salary, such as profits from investments or income from part-time jobs," said Lu Zhian, professor at the Law School of Fudan University.

Though citizens are encouraged to declare any income derived outside their salary, the practice is not compulsory in China. In addition, as payments are often made in cash, the tax bureaux have no access to personal income records and thus have almost no way to uncover individual tax avoidance.

"An enormous amount of individual tax is lost each year, especially profits from investment by the wealthy - as seen in Shanghai's property market" said Lu.

Li Xu, an analyst with a local property agency, confirmed that most of his clients paid no individual income tax though some of them make tens of thousands of yuan in a single transaction.

"According to the individual income law, profits from selling one's properties could be taxed at up to 20 per cent, but since the transaction are only registered in local Land and Housing Administration Bureaux, why should they bother to declare the profits to the tax bureau?" he said.