China’s first green tax law: Towards the new normal of high-quality growth

  • Published: 9 May 2018
  • Author: Gloria Luo

China’s Environmental Protection Tax Law, the nation’s first green tax law, took effect on January 1st, 2018 as one of its newest environmental policy initiatives to combat pollution.

Holding polluters responsible

China has collected discharge fees on air and water pollutants, solid waste and noise since 1979. Over the past 40 years, an estimated RMB 316.9 billion had been collected from some 13.8 million pollutant discharging entities. The effectiveness of this process, however, has been undermined by loopholes and double-dealing such as low charges, lack of compliance and inappropriate exemptions that were discretionarily exploited by some local governments and favoured enterprises.

Considering the deficiencies and weak enforcement of the previous fee-based system, the new Law aims to establish the first national tax regime, factoring the full costs of pollution into the pricing mechanism and offering businesses economic incentives to curb pollution and embrace clean technologies. An annual collection of RMB 50 billion is expected.

Unlike the previous discharge fees that served more as a source of government revenue and an administrative measure, the new Law has been devised to integrate environmental protection into business decisions and ultimately encourage more environmentally responsible behaviour. According to OECD, more than 50 countries around the world have adopted similar environmental taxation, which is considered to be one of the most efficient and effective policy tools to promote sustainable growth.

What is new

It is worth noting that compared to the previous system, the application scope including taxpayers, taxable pollutants and rates remain essentially similar under the Law, though with more stringent legal enforcement of a set of uniform national rules. While basically no new obligations were created, the Law brings about some new, encouraging developments:

  • Regulating the range of tax rates: The central authorities set a limit to the tax rate as ten times the current base rates of RMB 1.2 per unit of air pollutants and RMB 1.4 per unit of water pollutants, providing provincial governments the flexibility to determine their own rates according to local capacities, pollution conditions and objectives. The tax rates for solid waste and noise remain unchanged.
  • Offering new preferential tax treatments: A 25% reduction in environmental protection taxes will apply to qualified taxpayers whose air or water pollutant concentration levels reach 30% below the nationally and locally stipulated emission standards; half of the environmental protection taxes will be cut if taxpayers manage to reduce relevant concentration levels by 50% below national and local standards.
  • Strengthening administrative capacity: The tax authority, who is responsible for administering the tax collection, will work closely with the environmental protection authority, who will monitor pollutants and provide data as well as technical assistance, leading to a higher level of supervision, collaboration, information sharing and transparency.

What more to expect

The new Law stipulates that environmental protection taxes should be calculated monthly and declared and paid within 15 days after the end of each quarter. To better prepare for the first environment tax collection period in April, over 180,000 taxpayers were trained by local tax authorities on the declaration procedures, according to Xinhuanet. Upon the smooth implementation of the Law, businesses, particularly those in pollution-intensive industries such as energy, chemicals and textile, are facing growing pressure to cut pollution under the more stringent enforcement.

While the effects of this Law on pollution control remain to be seen, going green is no longer optional for companies doing business in China. As China’s leaders pledge to create “high quality” growth that is more balanced, inclusive, and sustainable, it is expected to become a business imperative and engender further incentives for China’s enterprises to proactively respond to the ever-increasing significance of environmental protection.