The water resource tax has been fully launched and the first shot has been fired in a new round of fiscal and taxation reform

On October 15, the Ministry of Finance, the State Administration of Taxation and the Ministry of Water Resources issued the "Implementation Measures for the Pilot Reform of Water Resources Tax" (hereinafter referred to as the "Pilot Measures"), clarifying that the pilot project of replacing water resources tax with tax will be fully implemented from December 1, 2024.

Since July 1, 2016, China has launched pilot water tax reforms in 10 provinces, including Hebei, Beijing and Tianjin.

According to the Pilot Measures, the taxpayers of water resources tax are units and individuals that directly draw water resources from rivers, lakes (including water resources allocation projects such as reservoirs and water diversion projects) and underground. The water resource tax shall be levied on a volume-based basis, and the tax amount shall be differentiated according to the status of water resources, the type of water withdrawn and economic development. After the full implementation of the pilot project of replacing water resources fees with taxes, all water resource tax revenues will be attributed to local governments, and local independent financial resources will be appropriately increased.

According to the minimum average tax rate of water resources tax in all provinces, autonomous regions and municipalities directly under the Central Government, the highest in Beijing is 1.6 yuan/cubic meter, and the lowest in more than 10 southern provinces such as Jiangsu, Zhejiang, Shanghai, Sichuan and Anhui, which is 0.1 yuan/cubic meter.

Li Hua, director of the Tax and Economic Research Center of Shandong University, told the Economic Observer that the purpose of the comprehensive implementation of the water resource tax pilot is to protect and save water resources. In addition, in the "Pilot Measures", the water resource tax rates of different provinces are different and all revenues are retained in the local area, which not only realizes the adaptation to local conditions, but also echoes the idea of expanding local fiscal revenue in the new round of fiscal and taxation system reform.

Yuan Haixia, executive director of China Chengxin International Research Institute, believes that the current local tax is mainly based on sharing tax, the main tax is missing, and the superimposed legal constraints are insufficient, so there is still room for optimization in the allocation of tax sources and tax sharing. The "Pilot Measures" will leave all the water tax revenue to the local government, appropriately increase the local independent financial resources, and have a certain effect on alleviating the pressure on local financial operation, and also release a positive signal significance for the start of a new round of fiscal and taxation system reform.

Different provinces have different tax amounts

A monthly tap water payment slip in Beijing shows the following: the comprehensive payment is about 75 yuan, of which the water fee is about 31 yuan, the sewage treatment fee is about 21 yuan, and the water resource fee is changed to 23 yuan. If the sewage treatment fee is not calculated, the tax revenue is about 72% of the water bill when compared to the water tax. The Pilot Measures stipulate that the taxpayers of water resources tax shall be units and individuals that directly draw water resources from rivers, lakes (including reservoirs, water diversion projects and other water resources allocation projects) and underground. The formula for calculating the tax payable is as follows: tax payable = actual water withdrawal× applicable tax amount. The Pilot Measures have published the minimum average tax rate of water resources tax for each province (autonomous region and municipality). The minimum average tax amount of surface water and water resources tax in Beijing is the highest in the country, of which the minimum average tax rate of surface water and water resources tax in Beijing is 1.6 yuan per cubic meter, which is 16 times that of more than ten southern provinces such as Sichuan, Fujian and Shanghai; The minimum average tax rate for groundwater resources is 4 yuan, which is 20 times that of the more than 10 southern provinces mentioned above.

On October 15, the heads of the relevant departments of the Ministry of Finance, the State Administration of Taxation and the Ministry of Water Resources also said that the tax amount for water withdrawal and groundwater withdrawal in areas with serious water shortage and overload should be determined from a high level, and the tax amount should be better played by setting up differential tax amounts to curb groundwater overexploitation and unreasonable water demand. Fully consider the differences in the status of water resources and the level of economic development in different regions, reasonably set the minimum average tax level in different regions, and authorize local governments to determine the specific applicable tax amount of water resources tax in their respective regions in accordance with regulations.

According to the Beijing Water Resources Bulletin released by the Beijing Water Affairs Bureau, in 2023, Beijing's total water resources will be 4.151 billion cubic meters, the annual average of permanent residents will be 21.8505 million, and the per capita water resources will be 190 cubic meters.

Will taxpayers' water costs increase after the nationwide implementation of the water resource fee to tax? The Pilot Measures clearly point out that the water resource tax paid by urban public water supply enterprises shall not be included in the price of tap water, but shall be listed separately in the terminal comprehensive water price and can be deducted from the VAT basis. According to reports, during the pilot period of water resource tax reform, the provincial development and reform department, together with relevant departments, will gradually adjust the terminal comprehensive water price structure in place, and in principle, the burden of water will not be increased due to the reform.

The reform of the fiscal and taxation system has gone further

The "Decision of the Central Committee of the Communist Party of China on Further Deepening Reform and Promoting Chinese-style Modernization" clearly states that it is necessary to "implement the rigid constraint system for water resources, comprehensively implement the reform of water resources fees and taxes" and "improve the green tax system".

In response to reporters' questions, the three ministries and commissions also said that the Third Plenary Session of the 18th Central Committee of the Communist Party of China proposed to adhere to the principle of paying for the use of resources and those who pollute the environment and destroy the ecology should pay, and gradually extend the resource tax to occupy various natural ecological spaces. The Resource Tax Law, which came into effect on 1 September 2020, authorizes the State Council to levy water resources tax on a pilot basis. The Central Economic Work Conference held in December 2023 proposed that it is necessary to adhere to the principle of seeking progress while maintaining stability, promoting stability through progress, establishing first and then breaking down, and planning a new round of fiscal and taxation system reform.

Before 2016, China mainly charged water fees. In 2016, China began to promote the "fee to tax" for water resources, and Hebei became the first pilot province to start the work of replacing water resources with tax on July 1 of that year. At the end of 2017, nine provinces, including Beijing, Tianjin, Shanxi, Inner Mongolia, Shandong, Henan and Sichuan, were also included in the pilot scope of water tax reform. The Resource Tax Law of the People's Republic of China (hereinafter referred to as the "Resource Tax Law") passed in 2019 officially enshrined the pilot reform of water resource fees into law.

Article 14 of the Resource Tax Law stipulates that the State Council shall, in accordance with the needs of national economic and social development and in accordance with the principles of this Law, levy a water resource tax on units and individuals that take surface water or groundwater on a pilot basis. Where water resources taxes are levied, the collection of water resources fees shall be stopped. Within five years from the date of implementation of this Law, the State Council shall report to the Standing Committee of the National People's Congress on the pilot project of levying water resources tax, and promptly submit proposals for amending the law.

Yuan Haixia believes that the Third Plenary Session of the 20th Central Committee of the Communist Party of China held in July 2024 proposed to "deepen the reform of the fiscal and taxation system", "increase local independent financial resources, expand local tax sources, and appropriately expand local tax management authority", the "Pilot Measures" is the first tax reform measure since the Third Plenary Session of the 20th Central Committee of the Communist Party of China. appropriately increase local independent financial resources; The Pilot Measures appropriately expand the authority of local tax administration, including adding new preferential tax policies that can be reduced or exempted by local governments, simplifying the tax rate standard of water resource tax, authorizing local governments to have more room for adjustment when determining specific tax amounts, and authorizing local governments to determine the verification method and collection method of water resource tax for specific water withdrawals.

According to public data, in 8 years (2016-2024), the number of water resource tax payers in Hebei Province increased from 17,000 in 2016 to 21,000, and a total of 14.917 billion yuan of water resource tax was collected. According to the calculation that all the resource tax revenue is transferred to the local government, the cumulative increase in income to Hebei is about 1.49 billion yuan in eight years.

Yuan Haixia believes that in the future, we can continue to optimize the local sharing ratio of shared taxes and fees, such as further increasing the local sharing ratio of value-added tax, moving consumption tax backward and steadily delineating localities, etc.; In addition, considering that the incentive effect of sharing tax on local governments to develop the economy and conserve tax sources is relatively weak, it is necessary to continue to expand other tax sources according to local conditions, and cultivate local exclusive taxes in combination with new drivers and new business forms, so as to ensure the stability and sustainability of local financial resources and promote local economic development.