By increasing fuel taxes and eliminating fees and road tolls, China expects to end a decade of debates over fuel price reform
Wang Changyong and Zhang Na, Caijing 16 December 2008
After more than 10 years of discussions, China has taken a first step toward long-awaited reforms for fuel pricing and taxes.
A draft plan was jointly announced by the National Development and Reform Commission (NDRC), Ministry of Finance, Ministry of Transport and State Administration of Taxation on December 5.
The public was invited to comment on the draft, which calls for raising the gasoline tax to 1 yuan per liter from the current 0.2 yuan, and lifting the tax on diesel fuel to 0.8 yuan per liter from 0.1 yuan. Despite the tax hikes, overall fuel prices would remain unchanged.
At the same time, the government would abolish six types of driver fees, including road and waterway maintenance fees, as well as passenger and freight surcharges. China also would gradually eliminate the tolls collected on secondary roads financed by local governments.
The public opinion period ended December 12, but relevant government offices were to continue discussions.
Zhang Xiaoqiang, deputy director of NDRC, said earlier he thinks January 1 would be “the best time to launch fuel pricing reform.”
Debates over the nationwide fuel tax first emerged after the first fuel tax was levied in Hainan Province in 1994 through a surcharge. Slumping international crude oil prices this year prompted policymakers to decide that the time was ripe for reform.
Some experts call the draft plan inadequate and lacking details. But others say it would help China build a pricing system that more accurately reflects market supply and demand, while also promoting energy conservation and reducing emissions.
Faster Pace
Proposals to replace road maintenance fees with fuel taxes have come and gone over the past decade. But NDRC sought to settle the matter when it summoned November 19 officials from various commission offices, tax bureaus and highway departments to a reform hearing in Beijing. Afterward, the pace of reform accelerated.
Since a wide range of interest groups would be affected by a January 1 implementation, the main obstacles in coming weeks revolve around how to effectively compensate agencies and individuals who may bear a financial brunt.
The plan’s authors have repeatedly said that overall fuel prices would not rise. To meet that target, China International Capital Corp. said offsetting tax increases would require gasoline price cuts of up to 1,500 yuan per ton, and diesel price reductions of up to 1,200 yuan per ton.
The draft says revenues from higher taxes would be used to maintain and manage roads and waterways, as well as compensate local governments for income lost with the elimination of road tolls. Tax fees also would be shared with farmers and others affected by the reform.
Other questions revolve around how taxes would be levied and collected, how revenues would be distributed among government departments, and which methods would be adopted for compensating reform-impacted groups while supporting the public sector.
Policymakers also need to work out solutions for issues tied to the distribution of revenues between central government and local governments after taxes replace road fees. So far, no detailed arrangements or compensation schemes have been disclosed.
Moreover, experts who participated in the draft procedure told Caijing the final reform plan will need to further clarify compensation schemes that currently subsidize public sectors.
Reform’s Restart
A former premier, Zhu Rongji, pushed for fuel price and tax reform in 2001. But the attempt shipwrecked in a sea of conflicting interests.
The biggest difference between the current and previous reform plans is the latest concession to eliminate tolls on local, government-funded secondary roads, rather than all toll roads nationwide. Tolls are now collected on 95 percent of the 24,700 kilometers of highways built between 2000 and ‘04.
Cutting out road and waterway maintenance fees is also seen as an important reform effort. Six categories of road charges would be abolished; all are collected by local governments, with some money passed on to higher government levels.
After fuel taxes replace road maintenance fees, said one transport expert, the money-distribution process may bog down local governments. “It may be a complicated procedure,” the expert said. “Money might not be allocated on time.”
Another obstacle is what to do about toll road workers – an issue that blocked the 2001 reform plan. About 20,000 workers currently collect tolls in Guangdong Province, a provincial transport bureau official told Caijing. Nationwide, according to the Ministry of Transport, about 240,000 toll collectors could be affected by the reform.
Methods and Goals
The fuel consumption tax could be imposed at four levels of the industry chain: retail, wholesale, production and consumption. Caijing learned the draft suggests taxing fuel producers, rather than retailers, which means fuel and diesel companies would pay taxes and pass on the costs by boosting wholesale prices.
Collecting taxes from producers is easier to manage and control. However, special users such as farmers and industrial consumers could be pinched by the added tax burden.
The government is looking for ways to balance the collection and distribution of tax revenues under various conditions. A Ministry of Finance official told Caijing that compensating “a wide range of targets is a very complicated procedure. Failing to properly compensate could trigger social conflicts, and may block the reform.”
Moreover, the official said, the compensation scheme could be even more complicated for taxes on consumption of diesel fuel, which powers not only cars and trucks but also farm equipment and power plants.
China may follow the examples of countries such as Japan, New Zealand and Sweden which have separate systems for collecting gasoline and diesel taxes.
Goals of fuel tax reform include conserving energy and improving social balance by increasing fuel use costs, according to Xiang Hongri, a researcher at the Development Research Center of the State Council. China’s current fuel taxes and prices are below international averages.
Another goal, said China Taxation Association President Yang Chongchun, is to make people who drive a lot pay more for road maintenance through taxes.
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Tolls Out, Taxes Up for Fuel Price Reform
By increasing fuel taxes and eliminating fees and road tolls, China expects to end a decade of debates over fuel price reform
Wang Changyong and Zhang Na, Caijing
16 December 2008
After more than 10 years of discussions, China has taken a first step toward long-awaited reforms for fuel pricing and taxes.
A draft plan was jointly announced by the National Development and Reform Commission (NDRC), Ministry of Finance, Ministry of Transport and State Administration of Taxation on December 5.
The public was invited to comment on the draft, which calls for raising the gasoline tax to 1 yuan per liter from the current 0.2 yuan, and lifting the tax on diesel fuel to 0.8 yuan per liter from 0.1 yuan. Despite the tax hikes, overall fuel prices would remain unchanged.
At the same time, the government would abolish six types of driver fees, including road and waterway maintenance fees, as well as passenger and freight surcharges. China also would gradually eliminate the tolls collected on secondary roads financed by local governments.
The public opinion period ended December 12, but relevant government offices were to continue discussions.
Zhang Xiaoqiang, deputy director of NDRC, said earlier he thinks January 1 would be “the best time to launch fuel pricing reform.”
Debates over the nationwide fuel tax first emerged after the first fuel tax was levied in Hainan Province in 1994 through a surcharge. Slumping international crude oil prices this year prompted policymakers to decide that the time was ripe for reform.
Some experts call the draft plan inadequate and lacking details. But others say it would help China build a pricing system that more accurately reflects market supply and demand, while also promoting energy conservation and reducing emissions.
Faster Pace
Proposals to replace road maintenance fees with fuel taxes have come and gone over the past decade. But NDRC sought to settle the matter when it summoned November 19 officials from various commission offices, tax bureaus and highway departments to a reform hearing in Beijing. Afterward, the pace of reform accelerated.
Since a wide range of interest groups would be affected by a January 1 implementation, the main obstacles in coming weeks revolve around how to effectively compensate agencies and individuals who may bear a financial brunt.
The plan’s authors have repeatedly said that overall fuel prices would not rise. To meet that target, China International Capital Corp. said offsetting tax increases would require gasoline price cuts of up to 1,500 yuan per ton, and diesel price reductions of up to 1,200 yuan per ton.
The draft says revenues from higher taxes would be used to maintain and manage roads and waterways, as well as compensate local governments for income lost with the elimination of road tolls. Tax fees also would be shared with farmers and others affected by the reform.
Other questions revolve around how taxes would be levied and collected, how revenues would be distributed among government departments, and which methods would be adopted for compensating reform-impacted groups while supporting the public sector.
Policymakers also need to work out solutions for issues tied to the distribution of revenues between central government and local governments after taxes replace road fees. So far, no detailed arrangements or compensation schemes have been disclosed.
Moreover, experts who participated in the draft procedure told Caijing the final reform plan will need to further clarify compensation schemes that currently subsidize public sectors.
Reform’s Restart
A former premier, Zhu Rongji, pushed for fuel price and tax reform in 2001. But the attempt shipwrecked in a sea of conflicting interests.
The biggest difference between the current and previous reform plans is the latest concession to eliminate tolls on local, government-funded secondary roads, rather than all toll roads nationwide. Tolls are now collected on 95 percent of the 24,700 kilometers of highways built between 2000 and ‘04.
Cutting out road and waterway maintenance fees is also seen as an important reform effort. Six categories of road charges would be abolished; all are collected by local governments, with some money passed on to higher government levels.
After fuel taxes replace road maintenance fees, said one transport expert, the money-distribution process may bog down local governments. “It may be a complicated procedure,” the expert said. “Money might not be allocated on time.”
Another obstacle is what to do about toll road workers – an issue that blocked the 2001 reform plan. About 20,000 workers currently collect tolls in Guangdong Province, a provincial transport bureau official told Caijing. Nationwide, according to the Ministry of Transport, about 240,000 toll collectors could be affected by the reform.
Methods and Goals
The fuel consumption tax could be imposed at four levels of the industry chain: retail, wholesale, production and consumption. Caijing learned the draft suggests taxing fuel producers, rather than retailers, which means fuel and diesel companies would pay taxes and pass on the costs by boosting wholesale prices.
Collecting taxes from producers is easier to manage and control. However, special users such as farmers and industrial consumers could be pinched by the added tax burden.
The government is looking for ways to balance the collection and distribution of tax revenues under various conditions. A Ministry of Finance official told Caijing that compensating “a wide range of targets is a very complicated procedure. Failing to properly compensate could trigger social conflicts, and may block the reform.”
Moreover, the official said, the compensation scheme could be even more complicated for taxes on consumption of diesel fuel, which powers not only cars and trucks but also farm equipment and power plants.
China may follow the examples of countries such as Japan, New Zealand and Sweden which have separate systems for collecting gasoline and diesel taxes.
Goals of fuel tax reform include conserving energy and improving social balance by increasing fuel use costs, according to Xiang Hongri, a researcher at the Development Research Center of the State Council. China’s current fuel taxes and prices are below international averages.
Another goal, said China Taxation Association President Yang Chongchun, is to make people who drive a lot pay more for road maintenance through taxes.
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