The Zhitong Finance App learned that Huatai Securities released a research report saying that the consumption tax reform may focus on adjusting the scope and tax rate of taxation, moving back in the collection process as appropriate, moving income distribution moderately downward, or marginally mitigating the local financial gap, but the impact at the macro level may be moderate. Among them, the indirect “price increase” effect on varieties with large price differences between the factory price and retail and wholesale prices will be more obvious by moving backwards in the collection process. Furthermore, in addition to being an important source of fiscal revenue, consumption tax also has the function of compensating for externalities and regulating income distribution. It is not ruled out that it will affect the distribution of some industries and reshape the competitive pattern of the industry. It also helps to adjust local government incentives and change the previous “heavy production and light consumption” situation of local governments.

The main views of Huatai Securities are as follows:

Current state of consumption tax collection in China

According to data from the Ministry of Finance, China's total consumption tax revenue in 2023 was 1.6 trillion yuan, accounting for about 8.9% of the country's tax revenue and 1.3% of nominal GDP. It is the fourth largest tax in China after value-added tax, corporate income tax, import value-added tax, and consumption tax. China's consumption tax is an “in-price tax”, which includes 15 product categories. The main revenue comes from tobacco (2023 revenue of 751 billion yuan, accounting for 53% of the consumption tax), refined oil products (33%), automobile manufacturing (7%), and alcohol (5%). Currently, consumption tax revenue belongs entirely to the central government, and the collection is mainly concentrated on the production process, and levied in the form of “intra-price tax”, that is, an “invisible tax” for consumers. In 2023, China's domestic consumption tax revenue was 1.61 trillion yuan, accounting for about 8.9% of the country's tax revenue and 1.3% of the country's GDP.

In terms of categories, since the 1994 tax division reform, consumption tax lines have been adjusted many times, and the tax categories have gradually evolved into 15, mainly contributing from the four tax categories of tobacco, refined oil, cars, and alcohol consumption. Specifically, they include 1) limiting consumer demand for “harmful” products, such as tobacco, alcohol, firecrackers, fireworks, etc.; 2) regulating income distribution, taxing luxury goods and high-end products to raise the tax burden level of income groups, such as precious jewelry, jewelry, cosmetics, luxury watches, golf boats and yachts, and yachts etc.; 3) Regulate the economic externalities of consumer products and consumer behavior, and polluting products , taxation of resource-based products, such as motorcycles, cars, wooden floors, disposable wooden chopsticks, refined oil, paint, batteries, etc.

Currently, consumption tax is mainly levied on the production process, and it is the exclusive tax of the central government. With the exception of gold, silver, platinum, and diamond jewelry, which are expropriated during the retail process, cigarettes are expropriated during production and wholesale, ultra-luxury cars are expropriated during production and retail, and all other categories of products are expropriated during the production process.

Consumption Tax Reform: Categories and Tax Rates

In terms of global comparison, raising tax rates on some products and sharing between central and local governments may be the key direction of future reforms — there is not much room for further expansion of China's consumption tax in the main categories, but among the main categories, the tax rates on tobacco, alcohol, and refined oil products are lower than in major countries around the world, but considering the overall policy trend to encourage consumption, the room for an increase may be limited. In terms of international comparison, China's consumption tax collection covers a wide range of categories. Products other than tobacco, refined oil products, automobiles, and alcoholic consumer goods contribute less than 2%. Further increases the scope or is less beneficial to increasing tax revenue, and may have a negative impact on consumer demand.

However, in terms of international comparison, China's overall tax rate on tobacco, alcohol, and refined oil products is low — according to WHO statistics, as of 2021, China's tobacco tax accounted for about 54% of the total retail price, higher than 40% and 39% of the US and Vietnam, but significantly lower than EU countries (60% or more), South Korea (74%), Saudi Arabia (74%), Japan (61%), and India (58%); taking spirits (spirit) as an example, China's alcohol consumption tax accounts for 16.3% of retail prices, slightly higher than Japan (16.2%), Brazil (9.2%) Significantly It is lower than Finland (66.8%), Australia (56.5%), the United Kingdom (47.2%), and South Korea (43.1%). According to OECD statistics, as of 2022, gasoline taxes in European countries such as Sweden, France, and Italy account for 67% to 76% of retail prices, while using No. 92 gasoline estimates China's consumption tax rate per liter is about 25.1%, higher than the US's 14.1%, and lower than most other developed countries.

The potential impact of consumption tax reform

Judging from the experience of other countries, consumption tax has become a supplementary source of revenue for local governments in some countries. For example, consumption tax in the US, France, Japan, South Korea, etc. is all shared by the central government. Against the backdrop of pressure on land revenue and falling local revenue, China's consumption tax collection may partially “move backwards” in the process and marginally supplement local revenue. Judging from international experience, the US and France share consumption tax between the central and local authorities. According to IMF statistics, local government shares in 2022 were 65% and 37%, respectively, while Japan and South Korea, which are also in East Asia, the 2022 regional consumption tax split was 28% and 14%.

If the consumption tax collection process moves backwards, it may be necessary to comprehensively consider the feasibility and incentive effects on the local community. The division between the central government and local authorities is likely not directly implemented at a specific ratio, but it may be divided and attributed according to categories or even different aspects of consumer categories. On October 9, 2019, the State Council issued the “Promotion Plan for Adjusting Central and Local Revenue Division Reform after Implementing Larger Tax Cuts and Fees”, which proposes the reform of consumption tax - 1) Moving back in the collection process, gradually moving some of the current consumption tax items levied in the production (import) process to the wholesale or retail sector. 2) Steadily downgrade regions, expand local revenue sources, and guide local authorities to improve the consumption environment.

Huatai Securities believes that under the premise of “manageable collection and administration,” the consumption tax portion of some categories may be “moved back” to the wholesale/retail side, and a certain percentage will be transferred to the local government to expand local government revenue. However, at the specific implementation level, the production process is obviously less difficult to collect than the flow process. The collection effect after the consumption tax reform also requires a comprehensive evaluation. The ideas and priorities of the consumption tax reform in different categories may also be different — specifically, the four key categories are discussed as follows:

Alcoholic beverages (accounting for about 5% of total consumption tax revenue in 2023): Some have the conditions to move back to wholesale taxation, but retail collection is more difficult to implement. Currently, consumption tax in the alcohol industry is basically collected during the production process. In the short term, it is more difficult for the alcohol industry to move the consumption tax collection process backwards in the short term, especially on the retail side where there are many companies and are more scattered, but local governments may be motivated to first levy the foreign wholesale process from dealers with a limited number and less difficult to collect and administer.

Tobacco (accounting for about 53%): If the conditions are in place to move to the wholesale process after the collection process, or even further back, the share of local taxes may increase. Since the tobacco monopoly system is implemented, that is, the country implements monopoly management and unified management of the production, sales, import and export business of tobacco monopoly products, in a certain sense, the whole process forms a closed loop. If the expropriation process “moves backwards”, collection and administration are less difficult and tax losses are small. At present, consumption tax has been levied on cigarettes in the wholesale process. In the future, more tobacco products may be levied at the wholesale level, and the central government may adjust the distribution ratio simultaneously. For example, as a major tobacco province, Yunnan's GDP ranked 18th in the country in 2023, but consumption tax revenue ranked 4th in the country. As the collection process “moves backwards” and the share of local taxes increases, the situation where consumption tax is concentrated on the production side may be marginally mitigated.

Automobiles (accounting for about 7%): There are conditions and motives for deferring the collection process and sharing taxes with local authorities. The automobile distribution system has a short chain, and there are clear automobile licensing regulations in various regions. The retail process is relatively easy to control and can effectively reduce collection costs. Therefore, the automobile industry's backward consumption tax collection process is not very difficult at the operational level. Currently, ultra-luxury cars have been subject to 10% consumption tax in the retail chain. Furthermore, if local governments can get more tax revenue from new car sales, it will also help local governments improve infrastructure and improve the vehicle usage environment.

Refined oil products (accounting for about 33%): It is difficult to transfer them after short-term levy. Refined oil products are mainly reflected in gas stations in various regions on the retail side. The distribution is scattered, and the expropriation process is “backwards” or difficult. However, with the improvement of the tax infrastructure, refined oil products may also gradually have the conditions to be levied at the retail level.

The potential impact of consumption tax reform

Consumption tax reform may focus on adjusting the scope and tax rate of taxation, moving back the collection process as appropriate, moving income distribution moderately downward, or marginally mitigating the local fiscal gap, but the impact at the macro level may be moderate. As the real estate cycle weakens, local government land-related revenue has shrunk in the past two years. For example, revenue from state-owned land concessions in 2023 fell by 33.4% compared to 2021, and land-related tax revenue fell 17% compared to 2021. Compared to the scale of land concession revenue, consumption tax has been steadily lowered in regions, and the ability to supplement local revenue in the short term is or relatively limited. At its peak in 2021, the local government's land use rights concession revenue reached 8.5 trillion yuan, while the consumption tax reduction had limited local growth, making it difficult in total to offset the drag on local government financial resources from land concession revenue. At the same time, the post-consumption tax transfer will change the current consumption tax distribution pattern in various provinces. Some provinces may experience a decline.

The indirect “price increase” effect on varieties with large price differences between the factory price and retail and wholesale prices will be more obvious. Previously, consumption tax was levied in the production process, which required advance payment of taxes. Moving back in the collection process helped reduce the use of the company's working capital, but the price of the product will also gradually rise from leaving the factory, circulation, and finally to retail. Moving back in the collection process may increase collection costs, increase the cost of distribution and sales, or put pressure on terminal prices to rise. Therefore, manufacturers may benefit in the short term due to a reduction in direct tax burdens, but the “tax increase” effect may be quite obvious, especially for consumer goods with a large price difference between the terminal and the factory price.

Furthermore, in addition to being an important source of fiscal revenue, consumption tax also has the function of compensating for externalities and regulating income distribution. It is not ruled out that it will affect the distribution of some industries and reshape the competitive pattern of the industry. It also helps to adjust local government incentives and change the previous “heavy production and light consumption” situation of local governments. For example, an increase in the tax rate on refined oil products may help the development of new energy vehicles, while the automobile consumption tax may be transferred to local governments, which may help all regions improve infrastructure and vehicle usage conditions, thereby increasing the number of cars owned, and breaking down some of the less efficient traffic restrictions and purchase restrictions.

Take alcohol as an example. The 2001 liquor consumption tax, which was “taxed on an as-you-go”, promoted the liquor industry's “high-end” trend. If the alcohol consumption tax rate is adjusted and the collection process moves backwards, it may have a relatively small impact on sub-categories with small price differences between factory delivery and wholesale/retail. Admittedly, high-end liquor brands with limited supply and high scarcity have higher premiums and are more capable of passing on consumption tax, and may be less directly affected by consumption tax reform (but may be more affected by changes in the macroeconomic environment).

Also, take the purchase tax on refined oil products and automobiles as an example: if the tax rate for refined oil products is raised, or if there is a marginal boost to new energy vehicles, at the same time, automobiles are taxed on the consumer side and partially lowered, helping local governments to optimize travel-related infrastructure and travel and purchase restriction policies. From here on, the margins of production and construction are skewed towards “expanding consumption” and public services.

Currently, direct taxes related to the automobile industry include consumption tax, value-added tax, purchase tax, and vehicle and vessel tax. The total of these four major taxes in 2021 is about 625.9 billion yuan, of which vehicle purchase tax accounts for more than 50%, and consumption tax accounts for about 16%. Both are owned by the central government. The local ownership ratio is only 19% (partial VAT and all vehicle and vessel tax), considering that automobiles have a large externality in the sales process (such as air pollution, traffic congestion, etc.), if this part of the tax is skewed towards local governments, it may help optimize travel and related restrictions in various regions Purchase restriction policies, especially in regions with developed economies and concentrated populations.

Risk warning: Fiscal and taxation policy reforms have fallen short of expectations, and the decline in consumer consumption has exceeded expectations.