New Chinese tax breaks set to boost consumption

he recent move to include care expenses for children under the age of 3 as part of the special additional deductions for individual income tax is expected to reduce the financial burden on families, increase their consumption capacity, and is conducive to the long-term improvement of the nation's overall demographic structure, experts say. The State Council said on Monday in a document that starting from Jan 1, the individual taxable income of such parents can be reduced by a total of 1,000 yuan ($156) per month for each baby. The deduction can be applied in full by one parent or can be split evenly, added the document.

The move was hinted in this year's Government Work Report made in March at the annual session of the National People's Congress, the nation's top legislative body.

Experts see the new tax break policy as important and inclusive in relieving the financial burden of families with infants and it is likely to boost overall consumption. They also believe it will work as part of a holistic approach in encouraging China's population growth.

“The decision to introduce tax breaks for families taking care of children under the age of 3 was made in light of overall demographic changes in China in recent years. It will not only be conducive to balanced population growth in the long run and better tap into China's demographic potential, but will also help lay a solid foundation for accumulating human capital and promote high-quality development,” said Li Xuhong, director of the Institute of Finance and Taxation Policy and Application at Beijing National Accounting Institute.

“Also, such tax breaks will increase the disposable income of households, and boost their willingness to consume,” she said.

China's income tax system is in the process of improvement, and it will eventually adequately bring down the income tax level of middle and low-income earners. This will bring about tangible social welfare and boost consumption.

Consumption is widely regarded as a key factor in driving economic growth this year. The Government Work Report this year noted the need to expand domestic demand and keep boosting the recovery in consumption.

Shi Yinghua, a professor at the Chinese Academy of Fiscal Sciences, said that the new tax breaks “will not only help relieve the burden for families with children under 3”, but will also help to positively shape the consumption and income expectations of couples planning to have children, she said.

She added that the new tax deduction policy will be well-aligned with the current individual tax breaks in other areas such as expenses related to preschool and compulsory education. Families with children under the age of 3 had previously been unable to enjoy such individual tax deductions.