Interpreting the "15th Five-Year Plan" Outline | Exclusive Interview with Li Xuhong: The Individual Income Tax Comprehensive Collection Scope Will Gradually Expand in the Future, Eventually Achieving a "More Thorough Combination" of Comprehensive and Categorical Taxation

Everyday Economic News Reporter | Zhang Rui Everyday Economic News Editor | Huang Sheng

On March 13, the “Outline of the 15th Five-Year Plan for National Economic and Social Development of the People’s Republic of China” (hereinafter referred to as the “Outline”) was publicly released.

Regarding the improvement of the modern fiscal system, the Outline proposes to deepen fiscal and tax system reforms, leverage the role of proactive fiscal policies, strengthen scientific fiscal management, and enhance fiscal sustainability. It emphasizes macro guidance over budget formulation and fiscal policies, utilizing medium-term fiscal planning to balance multi-year budgets, and ensuring funding for major national strategies and basic livelihood security.

Notably, unlike the “14th Five-Year Plan” which separately addressed accelerating the establishment of a modern fiscal system and improving the modern tax system in two sections, this time the “Outline” consolidates these into a unified deployment under the section “Improving the Modern Fiscal System.”

Additionally, the “Outline” introduces many new expressions. For example, it proposes to “improve a comprehensive and classified personal income tax system,” “enhance VAT credit and refund policies and deduction chains,” “optimize sharing ratios of shared taxes,” and “study tax systems compatible with new business models,” among others.

In light of these new statements, Daily Economic News (hereinafter referred to as NBD) interviewed Li Xuhong, Vice President and Professor at the National Accounting Institute in Beijing.

Li Xuhong, Photo Source: Provided by the interviewee

Future plans include gradually expanding the scope of comprehensive individual income tax collection

NBD: Compared to the “14th Five-Year Plan” outline, the “Outline” proposes to strengthen the coordination of fiscal resources and budgets, increase efforts to coordinate government fund budgets, state-owned capital operation budgets, and general public budgets, improve the state-owned capital operation budget system, reasonably increase the proportion of state-owned capital revenue, and include all income derived from administrative authority, government credit, and state-owned assets into government budget management. What is the main background for this?

Li Xuhong: Based on the new economic and social development situation and fiscal operation realities during the “15th Five-Year” period, this deployment is both practically necessary and strategically forward-looking. While China’s economic recovery continues to strengthen, issues of unbalanced and insufficient development remain prominent, and fiscal operations face tight balancing pressures. Local financial capacity and key expenditure pressures are significant, with some fiscal resources scattered, coordination insufficient, and management not standardized enough, affecting fund efficiency and fiscal sustainability.

At the same time, regulating government revenue management by including all income derived from administrative authority, government credit, and state assets into budget control is a necessary step to uphold fiscal discipline, prevent and resolve fiscal risks, and improve modern budget systems. This helps concentrate financial resources to support major national strategies, key livelihood projects, and critical sectors, addressing issues like fragmented budgets and irregular income and expenditure management, thereby enhancing macroeconomic regulation and control.

NBD: Compared to the “14th Five-Year Plan” which proposed to “improve the personal income tax system, promote the expansion of comprehensive collection, and optimize tax rate structures,” the “Outline” suggests to “improve a comprehensive and classified personal income tax system,” gradually expand the scope of comprehensive collection, and improve policies on business income, capital income, and property income. How should we understand the “combination of comprehensive and classified personal income tax systems”? What considerations led to the proposal to “improve policies on business, capital, and property income taxes”?

Li Xuhong: The core of a combined and classified personal income tax system is to tax certain similar types of income through annual aggregation and annual reconciliation, while taxing other types separately on a monthly or per-transaction basis. This approach balances tax fairness and administrative efficiency, and better reflects the ability-to-pay principle, aligning with China’s tax development realities. In the future, the scope of comprehensive collection will gradually expand, ultimately moving from the current preliminary combination toward a more thorough integration.

The proposal to “improve policies on business, capital, and property income taxes” during the “15th Five-Year” period is mainly driven by the need to optimize income distribution patterns and improve the tax system structure. Currently, residents’ income sources are becoming more diverse, with an increasing share of capital and property income. The existing tax system has insufficient regulation over these types of income, leading to potential tax burdens imbalance. Additionally, new business models often face tax mismatches, with existing systems creating blind spots and opportunities for tax avoidance. This initiative aims to further improve the tax system, close loopholes related to income conversion and estimated taxation, promote fairness and efficiency, and support common prosperity.

During the “15th Five-Year” period, policy focus will shift from “large-scale preferential policies” to “systematic improvement”

NBD: The “Outline” proposes to improve VAT credit and refund policies and deduction chains, and optimize sharing ratios of shared taxes. Does this mean there will still be VAT credit and refund preferential policies during the “15th Five-Year” period? What is the deeper meaning behind “optimizing sharing ratios of shared taxes”?

Li Xuhong: Improving VAT credit and refund policies and deduction chains does not simply mean continuing or expanding preferential policies, but rather optimizing institutional design. During the “15th Five-Year” period, the policy focus will shift from “large-scale preferential policies” to “systematic improvement,” transforming policies from temporary relief measures to normalized and standardized systems. Future efforts will focus on streamlining refund procedures, addressing deduction gaps, and establishing fair sharing mechanisms to precisely support key sectors like manufacturing and technological innovation, alleviating corporate capital pressures and eliminating distortions in market behavior.

Optimizing the sharing ratios of shared taxes primarily aims to clarify the fiscal relationship between central and local governments, and to improve the modern fiscal system. Currently, VAT and other shared taxes are important sources of local government revenue. Adjusting sharing ratios seeks to balance regional fiscal disparities, ease some local fiscal pressures, ensure local governments fulfill their fiscal responsibilities, and enhance fiscal stability and sustainability. It also encourages local governments to shift development focus from tax competition to improving the business environment and cultivating endogenous growth drivers, aligning fiscal capacity with high-quality development, and promoting the construction of a unified national market.

Recommend forward-looking research on tax adjustment mechanisms for data resource ownership and processing rights

NBD: The “Outline” proposes to study tax systems compatible with new business models. Do you have any suggestions in this regard?

Li Xuhong: Developing tax systems suited to new business models should adhere to principles of inclusiveness, prudence, fairness, and ease of administration, balancing innovation vitality with orderly tax collection.

First, clarify the tax boundaries of new business models, define tax obligations and withholding responsibilities for platform companies, gig workers, digital services, etc., and proactively study tax adjustment mechanisms related to data resource ownership and processing rights to prevent blind spots in tax enforcement and ensure fair taxation online and offline.

Second, improve adaptive tax administration mechanisms by leveraging big data, AI, and digital tools to optimize information sharing among tax authorities, platforms, and financial institutions, enhancing precise enforcement.

Third, tailor tax policies to the characteristics of new business models, such as asset-light, flexible, and cross-sector integration, refining VAT and income tax policies to avoid lagging behind development needs.

Fourth, uphold the principle of tax lawfulness, gradually bringing new business model taxation into the legal framework, balancing regulatory norms with inclusive development, supporting healthy and orderly growth, and cultivating new drivers of economic growth.

NBD: Compared to the “14th Five-Year Plan” which only proposed “standardizing and improving tax incentives,” the “Outline” emphasizes fully implementing the principle of tax lawfulness, regulating tax incentives, strengthening financial and accounting supervision, and accelerating the establishment of a long-term government debt management mechanism compatible with high-quality development. What signals does this send?

Li Xuhong: Overall, these measures demonstrate a firm commitment to rigid institutional constraints on fiscal power and the use of rule-of-law thinking to prevent fiscal risks, signaling a deepening reform of the fiscal and tax system with a focus on strengthening legal guidance and risk control.

First, a clearer legal orientation. Upholding the principle of tax lawfulness, accelerating the improvement of the tax legal system, and promoting the normalization and institutionalization of tax incentives to prevent arbitrary benefits and policy arbitrage, thereby maintaining a unified and fair tax system.

Second, stricter discipline requirements. Reinforcing financial and accounting supervision with comprehensive, full-process mechanisms, strictly enforcing fiscal discipline, standardizing fiscal fund management and tax collection, and increasing transparency and compliance in fiscal operations.

Third, enhanced risk prevention. Strengthening the bottom line of debt risk control, accelerating the development of a long-term government debt management mechanism aligned with high-quality development, strictly controlling implicit debt risks, and improving fiscal sustainability.