China To Introduce Property Tax In Select Regions: Will It End Practice Of Local Governments Expropriating Land From Farmers And Giving To Real Estate Developers?

China’s rubber stamp state legislature has given approval for a five-year pilot plan to levy property tax in selected regions across the country.

The latest move is seen as part of President Xi Jinping's “common prosperity” programme to enhance housing affordability and tame runaway prices.

The Standing Committee of the National People's Congress (NPC), China's legislative body, on Saturday (Oct 23) adopted a decision to authorize the State Council to pilot property tax reforms in certain regions.

Property tax is set to be levied on all types of residential and non-residential property in pilot areas. However lawfully-owned rural houses built on them are excluded.

The Ministry of Finance and the State Taxation Administration will frame the relevant measures and regulations for supporting the pilot programme.

Chinese government has toyed with the idea of taxing property owners for over two decades now to rein in runaway prices, redistribute wealth and bolster state coffers with much-needed revenue. But it never implemented fearing that such a move with slow down country's real estate sector.

In 2011, property tax was trialled on second homes in Shanghai and Chongqing, but not expanded due to fears of public opposition and a real estate crash.

Close to three-fourth of household wealth is locked up in housing and property market is viewed as critical to sustain economic activity in several sectors of the economy. China’s housing market, fuelled by years of cheap credit, is estimated to account for 16% of GDP.

Housing holdings constitute the biggest component of Chinese households’ asset portfolios, partly driven by lack of other investment vehicles for both households and firms in China’s still underdeveloped financial markets.

A recurring property tax levy is likely to make it costlier to buy and hold a second or third home as a speculative bet and also force some absentee homeowners to sell their vacant flats or rent them to the many citizens priced out of the market.

The pilot program to introduce property tax is also aimed at reducing the extreme dependence of local governments on selling and leasing public land to developers to fund various projects, a practice that has contributed to widespread property speculation and pushed land and property to astronomical levels.

While local governments undertake over four-fifths of the country's public spending, they collect only half of the taxes. China’s local governments heavily rely on land sale revenues and use future land sale revenues as collateral to raise debt financing through

One of the special feature of Chinese real estate is that markets for residential properties and commercial real estate are crucially tied to land sale policies and strategies of local governments.

Also under the current land requisition system, local governments in China have the power to expropriate land from farmers and lease the land either to manufacturing land users at subsidized prices, or to commercial and residential land users at higher prices. This could happen because local governments are empowered by the present land requisition and public leasing system almost as the monopolistic player in land taking, preparation and leasing process.