China looks to tackle problems for debt-ridden local authorities with water tax reforms
Ministry of Finance announces expansion of the Water Tax Interim Measures from 10 provinces to the entire nation, effective from December 1
China’s Ministry of Finance said on Tuesday that it would expand the Water Tax Interim Measures from 10 provinces to the entire nation, effective from December 1, amid efforts to provide debt-ridden local authorities with more revenue.
The measures aim to safeguard water resources, curb groundwater over-exploitation, ease the growing supply-demand imbalance and refine the taxation system, according to the ministry.
“All water resource tax revenues will be allocated to local governments to boost their autonomous financial resources, broaden local tax bases and appropriately expand the management authority over local taxes,” it said.
The move, though, is believed to be largely symbolic as the new increase for local authorities are estimated to be only billions of yuan, far lower than their confirmed debt of 43.6 trillion yuan (US$6.1 trillion) and speculated so-called hidden debt of trillions of yuan.
However, it marked a further intention to help restore local fiscal capabilities, with other measures including increased transfer payments from central government and other local taxes such as consumption tax.
The tax aims to raise enterprises’ awareness and motivation for water conservation, encouraging them to enhance water use efficiency
Income from water resource fees are divided between the central and local governments, with the central government receiving 10 per cent of the revenue.
China initiated a pilot water resource tax in Hebei province, a water-stressed northern region, in 2016, and officially integrated the tax into national legislation in 2019.
The new 33-point plan exempts rural organisations from taxation on water drawn from local reservoirs, along with domestic water use and water used for public safety or drought relief.
It will set high tax rates for groundwater usage in water-stressed areas, as well as for industries like car washes, bathhouses, golf courses and ski resorts.
Manufacturing enterprises, which account for 16 per cent of the country’s water usage, must meet specific efficiency standards to qualify for a 20 per cent tax reduction in the following year.
“The tax aims to raise enterprises’ awareness and motivation for water conservation, encouraging them to enhance water use efficiency through conservation initiatives and technological innovation,” the finance ministry said.
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China has long grappled with water scarcity and uneven distribution between its northern and southern regions, posing a threat to its agriculture, energy and manufacturing sectors.
The country has 20 per cent of the global population, while possessing only 7 per cent of the world’s freshwater resources, according to the World Bank.
After the implementation of a water fee-to-tax scheme, Hebei province experienced a 40 per cent reduction in water consumption per 10,000 yuan (US$1,405) of gross domestic product and a 44 per cent decrease in groundwater extraction from 2015 to 2023, according to government-backed China Tax News last month.
Over the past eight years, the number of water resource taxpayers in Hebei province has risen from 17,000 in 2016 to 21,000 in 2023, resulting in a total collection of 14.917 billion yuan (US$2.1 billion) in water resource taxes.
Local fiscal revenue rose by only 0.4 per cent from a year earlier to 8.24 trillion yuan in the first eight months, government data showed.
Income from land sales, meanwhile, dropped by 25.4 per cent year on year to 2.02 trillion yuan during the same period.
