China’s taxation system has made extraordinary achievements after independence about 70 years ago. In updating the laws, it is essential to achieve a balance between state administration of tax (SAT), enforcement powers and the rights of taxpayers. For many years, tax administration in China had been governed by various tax statutes, orders, and regulations whose scope and legal standing were unclear. This situation has been significantly improved by the enactment of the Law on the Administration of Tax Collection in 1992 and the continuous refinement of the substantive tax laws over the past two decades. These laws and their related regulations provide the policy and legal foundation for China’s tax administration today.
Chinese taxation from two dimensions: economy and society. Chinese tax system ensured close links between tax policy, tax administration, and the revenue-sharing and collection system between central and local governments. It split the tax agency into two separate organisations – the National Tax Service and Local Tax Services under local government. The local government used to collect taxes locally. On the other hand, the central revenue department and local government work together to coordinate based on available information on certain transactions, asset accumulation, and income. They can work efficiently to collect VAT and Income tax.
Tax administration reform in China has reduced business compliance costs and improved taxpayers’ perceptions about the tax system, particularly in recent years. For example,
the amount of time that medium-sized Chinese companies spend on tax matters has been reduced from 832 hours in 2004 to 261 hours in 2013 (WB, 2015). Concerning the latter, taxpayer perception surveys conducted by the National Bureau of Statistics since 2008 indicate a steady increase in taxpayer satisfaction with the tax system. With rapid reforms, China encouraged foreign trade and improved the utilisation of foreign capital, which led to the emergence of typical modern economic enterprises, such as foreign-invested enterprises.
The Tax Collection Law establishes the common administrative provisions that apply to all of China’s substantive tax laws (on VAT, enterprise income tax, and so on). These include the key rules for each tax administration function (such as registration, filing and payment of taxes, auditing, and so on), SAT’s enforcement powers and penalty provisions, taxpayers’ rights and obligations, and dispute resolution procedures. Since the early 1990s, China has made great progress in creating a modern tax administration. The tax authorities’ powers and taxpayers’ rights have been codified in a tax procedures law, and many tax administration procedures have been automated based on a standardised computer system. These changes have helped to reduce tax evasion and compliance costs and contributed to raising the tax yield to nearly 20 percent of GDP.
China’s State Administration of Taxation (SAT) focuses strictly on nationwide enforcement, compliance, and administration, cleanly separating structural policymaking. Bangladesh’s structural separation of the NBR into dedicated Revenue Policy and Revenue Management divisions follows international best practices, but it is now hanging in uncertainty. To succeed, enforcement must be insulated from political patronage and internal conflicts of interest.
Chinese tax authorities are authorised to counter transactions deemed to have no commercial purpose other than avoiding tax by re-characterising the transaction and denying the tax benefits. To avoid its abuse, the tax authorities may not initiate an anti-avoidance investigation until it is approved by the SAT headquarters. The headquarters must also approve the final decision of an investigation.
Another new provision of the arm’s length principle requires that transactions between related parties must be priced and conducted as if they were between independent, unrelated entities. Enterprise Income Tax law establishes the arm’s length principle for valuing related intra-group transactions. It requires taxpayers to report related party transactions to the tax authorities. The tax authorities’ power to adjust a taxpayer’s taxable income if the taxpayer fails to comply with the arm’s length principle. The arm’s length principle may be introduced to oversee different transactions between sister companies to adjust the taxpayer’s actual income.
After independence in 1971, Bangladesh adopted the Income Tax Act of 1922, which remained in force until it was replaced by the Income Tax Ordinance, 1984. The tax law was finally updated, namely the Income Tax Act, 2023. Several SROs and Finance Acts of each year are an integral part of the income tax laws. Bangladesh’s income tax is updated through the finance tax of each year. The differences between the old Income Tax Ordinance 1984 and the Income Tax Act 2023 in Bangladesh except increase in the discretionary power of tax officials and the option of withholding tax. The law has empowered tax officials to make decisions without explaining the reason for their action. Over 90% of government tax collection relies on Tax Deduction at Source (TDS) and Advance Income Tax (AIT) rather than voluntary, broad-based compliance, placing an administrative shortcut in place of genuine reform.
Both advance income tax (AIT) and tax deducted at source (TDS) are imposed on total revenue rather than on profits. In the case of business-to-business (B2B) supply and government procurements. Purchasing authorities/entities are required to deduct tax at source from the payable amount against supply and deposit the same amount to the National Exchequer. The aggressive advance taxes and multi-layered withholding obligations disproportionately hurt Cottage, Micro, Small, and Medium Enterprises (CMSMEs), eroding their market competitiveness compared to large conglomerates.
Tax procedures must become transparent and user-friendly rather than repeatedly squeezing already compliant formal taxpayers. Simplifying filing for Small and Medium Enterprises (SMEs) brings informal actors into the documented economy. Under the previous Income Tax Ordinance, 1984, the ADR process was under the control of the NBR but not independent as it should be. The current law kept the provision unchanged and truly made the tribunal a part of the NBR. The government has been empowered to nominate members from Commissioners, Chartered Accountants and retired tax officials, etc.
The law, along with Statutory Regulatory Orders (SRO), has become very complex. National Board of Revenue (NBR) has no other choice but to issue a ‘Paripatra’ clarifying the laws and rules in September/October each year. There are only a few officials of NBR who can clarify the laws through the Paripatra. The laws and rules are not user-friendly for income taxpayers, tax practitioners and even tax officials.
China undertook rapid reforms and set four overarching objectives for tax administration reform: They reduced tax collection costs and compliance burdens, increased the efficiency of tax administration, strengthened the awareness of tax compliance, and improved taxpayer satisfaction. The involvement of local government in tax collection and information sharing with the central government is the foundation of the present success story of the Chinese tax department.
The present Chinese tax law system of China is like the present Bangladesh legal system. Bangladesh may follow China to reform and introduce a simple tax law for paying taxes and to reduce the cost of doing business. It can adapt the objectives of Chinese Tax laws. The rights of taxpayers and the responsibilities of NBR should be clearly incorporated in the tax law and policies.
The views expressed in this article are solely those of the author
The writer is the CEO of Bangla Chemical, and a legal economist. E-mail: [email protected]
