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Status Quo and Problems of China’s Consumption Tax on Refined Oil Products and Reform Suggestions
2016-08-15
By Guo Jiaofeng, Gao Shiji, Hong Tao, Wu Xu & Bai Yanfeng
Research Report Vol.18 No.3, 2016
Refined oil products refer to ethanol gasoline, bio-diesel and other alternative fuels, with the same use purpose and up to the national quality standard, like gasoline, kerosene and diesel. In 2015, the apparent consumption of these products in China was 313 million tons, more than 70% of which were motor fuels. Refined oil products have led to much environmental pollution, even though it has brought much convenience to transportation, improved peoples’ life, and promoted economic and social development. China had some 279 million motor vehicles in 2015, whose emission is the main contributor to dust-haze and photochemical smog. The consumption of refined oil products, however, will still be on the rise in the future. It is expected that between 2015 and 2020, the number of motor vehicles and quantity of refined oil products consumed in China will increase annually by 16 million and 6 million tons respectively, causing more exhaust gas, and more difficulties for environmental protection and emission reduction. It is therefore of necessity for us to implement eco-friendly development by improving the quality of refined oil products, using oil more efficiently, developing clean-energy vehicles and creating a market with fair competition. Finance is the basis and important pillar for national governance. As the important economic tool of national governance, taxation undertakes responsibilities like regulating the economy, guiding consumption, and protecting the environment. According to the Third Plenary Session of the 18th Central Committee of the Communist Party of China, China will deepen the reform of the taxation system, adjust the collection scope, procedures and rates of consumption tax, and levy this tax on products that consume too much energy and cause serious pollution as well as some high-end consumer goods, fully playing its role in guiding rational consumption. Specifically speaking, consumption tax on refined oil products, like ecological taxation, has been an effective way of guiding consumption and reducing environmental pollution by internalizing negative externalities of environmental pollution and excessive consumption of resources. But the current consumption tax on refined oil products, with problems like improper collecting procedures, and unfair distribution of tax income, can hardly promote eco-friendly development, which needs to be optimized to play a better regulating role of ecological taxation and advance sustainable development of energy.
I.Current Consumption Tax on Refined Oil Products in China
Under the current consumption tax system in China, consumption tax on refined oil products is to curb the consumption of refined oil products, and encourage their usage in a clean and sustainable way by regulating prices of refined oil products (Bai Yanfeng, Qiu Xuanxuan, Zhang Jing, 2015). 1. Improving the system of consumption tax on refined oil products following the philosophy of sustainable development The reform of consumption tax on refined oil products began in 1993 with the goal of increasing the cost of using refined oil products. Based on varied consumption tax rates, the reform focuses on adjusting collection scope and tax rate so as to use oil in an economical way, reduce unreasonable consumption demand, decrease air pollutants, and promote eco-friendly development (Jiang He, 2015). After several adjustments, consumption tax on refined oil products has a larger collection scope and higher rate. China began to impose tax on consumption of gasoline and diesel after the State Council promulgated Interim Regulation of the People’s Republic of China on Consumption Tax (Decree No. 135 of the State Council), and Ministry of Finance promulgated Detailed Rules for the Implementation of the Interim Regulation of the People’s Republic of China on Consumption Tax in 1993. Since then, Notice on Adjusting and Perfecting Consumption Tax Policies (No. 33 of Ministry of Finance and State Administration of Taxation, 2006) canceled tax on gasoline and diesel, but add tax on refined oil products with seven sub-items, including gasoline, diesel, naphtha, solvent oil, lubricants, heating oil, and jet fuel. Interim Regulation of the People’s Republic of China on Consumption Tax (Decree No. 539 of the State Council) adjusted consumption tax rates on refined oil products in 2008. Here are some examples. Tax on unleaded petrol is 0.20 yuan per liter (tax on leaded gasoline is 0.28 yuan per liter); tax on naphtha, solvent oil and lubricants is 0.20 yuan per liter; tax on diesel oil, heating oil and jet fuel is 0.10 yuan per liter. Notice on Implementing the Price and Tax Reform of Refined Oil (Decree No. 37 of the State Council in 2008, hereinafter referred to as Decree No. 37), taking effect since January 1, 2009, has greatly adjusted consumption tax on refined oil products. Since the second half of 2014 with the nosedive of international oil prices, China has, for three consecutive times, increased consumption tax on refined oil products, with the tax rate of gasoline, naphtha, solvent oil and lubricants rising from 1 yuan per liter in 2009 to 1.52 yuan per liter in 2015, that of diesel, jet fuel and heating oil from 0.8 yuan per liter to 1.2 yuan per liter. Besides, China still suspends tax on jet fuel and stops collecting price adjustment funds for refined oil products.
2. Current consumption tax on refined oil products basically acts as ecological tax At present with consumption tax accounting for 25% to 35% in the prices of refined oil products, China designs policies with the goal of encouraging energy conservation and curbing environmental pollution, so as to play the role of taxation in protecting the environment. Take prices of refined oil products on January 14, 2016 as an example, the maximum retail price for 90-octane grade gasoline (National Emission Standard Ⅳ) was 6,765 yuan per ton, with consumption tax and value added tax reaching 2,363 yuan per ton, 35% of the total; while that of zero-grade Diesel (National Emission Standard Ⅳ) was 5,820 yuan per ton, with consumption tax and value added tax amounting to 1,581 yuan per ton, 27% of the retail price. On the basis of Decree No. 37, China has established a system of consumption tax on refined oil products, involving collection procedures, scope, methods, tax management and income distribution. According to the decree, the tax is levied in refineries (including commissioned processors and importers), on gasoline, diesel, jet fuel (collection is suspended), naphtha, solvent oil, lubricants and heating oil. As a kind of central tax, it is calculated and collected on the quantity basis at a specific rate, and included in the price. There are some merits of imposing tax based on the quantity of products consumed. First, with such a method makes it easier to manage taxation. Second, the method provides shelter for the tax against price fluctuations in the market, ensuring government stable tax revenues and reducing tax burdens for consumers. Third, it helps improve the efficiency of using resources and promote energy conservation as well as emission reduction. Consumption tax on refined oil products, based on the quantity of products consumed, raises people’s consciousness of conserving energy and cherishing resources, so that oil prices can lead consumers in a reasonable and eco-friendly way (Jin Dongsheng, 2009). Fourth, the method is suitable for refined oil products, which have similar prices for homogeneous products, with standardized measurement. Fifth, it is an international practice to use the method for imposing consumption tax on refined oil products.
II.Main Problems in the Current System of China’s Consumption Tax on Refined Oil Products
Recent years have witnessed an expanding tax base and rising rate of consumption tax on refined oil products, in order to increase fiscal revenue, tackle worsening environmental problems like smog, and advance eco-friendly development. Data, however, show consumption tax on refined oil products from 2012 to 2014 remained some 280 billion yuan. There are two reasons. On the one hand, China lags behind in establishing a social credit system and has a flawed social supervision mechanism. On the other hand, the current system of consumption tax on refined oil products no longer suits eco-friendly development, with deep-seated contradictions and problems mainly in the following four aspects. ...
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