(Yicai) Aug. 31 -- China plans to merge its urban maintenance and construction tax with the education and local education surcharges into a single local surtax, as part of the country’s efforts to improve its local tax system.

The new local surtax rate will be between 11 percent and 13 percent, with the specific figure being determined by provincial-level governments based on their local economic and social development levels, according to a draft law released by the Ministry of Finance and the State Taxation Administration on Aug. 28, which is open for public opinion until Sept. 27.

The merger proposal was first raised in 2024, when the Third Plenary Session of the 20th Communist Party of China Central Committee outlined fiscal and tax reforms and authorized local governments to set specific rates within a range. The MOF suggested drafting the local surtax law in March this year.

The base of the new local surtax will be the same as that of the value-added tax and consumption tax, except for goods, services, and intangible assets imported into China by overseas entities and individuals.

China’s revenue from the VAT and consumption tax reached CNY8.58 trillion (USD1.28 trillion) last year, according to MOF data. Based on a rough estimate, the new local surtax revenue would yield CNY943.8 billion to CNY1.12 trillion (USD140.4 billion to USD166.6 billion) in revenue.

The draft also allows the State Council to reduce or exempt the local surtax for specific industries and groups of individuals and in response to major emergencies, based on economic and social development needs, subject to approval from the Standing Committee of the National People's Congress.

The draft law is based on the existing collection system for the one tax and two surcharges, as their frameworks and burdens are expected to remain largely the same. The urban maintenance and construction tax is divided into three rate tiers: 7 percent for urban areas, 5 percent for counties and towns, and 1 percent for other areas. The education surtax rate is 3 percent, while the local education surtax is 2 percent.

The merger simplifies tax collection and converts two surcharges into a tax backed by a formal legal basis, strengthening the legitimacy and stability of collection, Luo Zhiheng, chief economist at Yuekai Securities, told Yicai.

The rate structure balances simplification, stability, and regional variation, he noted, adding that giving provinces discretion to set rates within the 11 percent to 13 percent range strengthens local fiscal autonomy.

However, Luo warned that implementing the new local surtax still requires further assessment of the impact on taxpayers, particularly those benefiting from preferential tax policies, and how revenue previously earmarked for specific uses under the old system will be allocated going forward.

Editor: Futura Costaglione