China advances property tax reforms amid slowdown

The cooling of China's property market is likely to encourage authorities to speed up property tax reforms, which many believe will play a key role in putting the sector back on track.

A legislation plan to establish a property sector taxation system will be submitted to the Standing Committee of the National People's Congress, China's top legislature, later this year, Jia Kang, director of the Research Institute for Fiscal Science under China's Ministry of Finance, said at a forum on Friday.

Given the progress, the country is likely to complete the legislation process for the taxation system by the end of 2016, and related taxes will be implemented in 2017, Jia said.

The absence of such a system has enabled many Chinese to capitalize on the country's over-heated property market, making it a major source of public complaints over recent years.

Believing that there is not much room for a sharp appreciation amid the current market downturn, Zhao Zhengguo (not his real name) has this year sold two of several apartments he owned in Beijing in order to secure cash.

"It will not be long before the property tax spreads over the country. The tax itself is not a problem, but it will make housing less reliable as an investment choice," said Zhao, who rose from a wage earner to a billionaire thanks to his housing investment.

China launched property taxes in Shanghai and Chongqing on a trial basis in 2011 to tighten its property market control. It was expected that the trials would be expanded to cover more regions, but the expansion was postponed due to the lack of legal basis.

However, in a reform plan approved by the Third Plenary Session of the 18th Communist Party of China Central Committee last year, the country vowed to accelerate the legislation of taxes in the property sector.

This will involve a basket of tax reforms, including a real estate tax levied on homeowners and a land tax on property developers, said Zhuang Jian, a senior economist at the Asian Development Bank.

Unlike the private land ownership system practiced in western countries, individuals can only possess land use rights in China, where land is either state-owned or collectively-owned. This has added to the difficulties for the legislation work, according to Zhuang.

With a real estate tax, a homeowner has to pay taxes in proportion to the monetary value of their housing at a certain tax rate each year. In China, taxes are currently imposed only when a housing transaction takes place, which makes it easier for speculation.

While hailing the role of the Shanghai and Chongqing trials in changing public expectations and increasing social consensus for property tax reforms, Jia said the trials will also provide valuable experience for the reforms.

Despite the trials, debates have been going on over whether the tax package can really help regulate the market. Some worry that it will become a new burden for the country's already-suffering home-buyers.

Shen Jianguang, chief economist at Mizuho Securities, said that as a way to make up for the deficiency of the market mechanism, a properly designed tax system will effectively reduce speculation and help contain rapid price gains.

Authorities have so far refrained from introducing fresh administrative measures since the new leadership took office last year, reflecting an intent to let market forces correct the market.

Zhu Zhongyi, vice president of the China Real Estate Industry Association, said the current market slowdown provides an opportunity for the government to advance property market reforms.

Oversupply, lending difficulties and the bearish sentiment of home-buyers has weighed on the country' s property market. More Chinese cities posted month-on-month home price drops in the first half of 2014, and property investment growth has also slowed.

A draft regulation on the establishment of a real estate registration mechanism, which was submitted for discussion at a State Council meeting last month, is expected to be published to solicit public opinions soon.

The mechanism, together with a system to record individuals' housing ownership, is poised to pave the way for legislation of the tax package.