This year, the Chinese are not finding moon cakes as sweet as they normally do. Local tax authorities in Beijing, Shanghai and Nanjing have decreed that the cost of moon cakes gifted by employers to employees should be added to the incomes of the latter for calculating income tax. In other words, moon cakes can no longer be treated as non-taxable gifts. They will be considered part of the allowances eligible for taxing, much like the housing allowance.
The decision has obviously not gone down well with the residents of the three cities. Yue bing or moon cakes mark a joyous occasion for the Chinese. They are consumed during the mid-Autumn (Zhongqiu) festival, which is usually celebrated during the months of August-September, and are considered essential in the lunar worship marking the festival. The cakes are usually made of sweet lotus seed or red bean paste, occasionally mixed with egg yolk, and come mostly in round shapes. Having yue bing and tea in the company of friends and family while watching the moon is the quintessential Chinese vision of celebrating Zhongqiu.
Over the years, moon cakes have contributed to the growth of local bakery and confectionary businesses in China. Much like laddoos and gujiyas distributed during Diwali and Holi in India, moon cakes are gifted by businesses and employers to clients and workers during Zhongqiu. Informal networks, or guanxi, are famous in China for shaping business strategies and decisions. Gift-giving is an integral of part of maintaining and sustaining these networks.
With both producer and consumer incomes increasing in China, the yue bing industry has moved upmarket. Gold-plated moon cakes are pretty common these days. The biggest innovations have come in the form of fusions attempting to blend Western elements into traditional moon cakes. Ice cream moon cakes made by H?agen-Dazs have become enormously popular, as have moon cakes with truffle, caviar and also whiskey and champagne.
But why tax these cakes? It is important to note that authorities were careful in not imposing excise duties on yue bing as that would have immediately resulted in an increase in their prices. With moon cakes becoming expensive now, inflation would have become higher, as would have popular discontent. The festive mood would have turned even sourer.
Rather, the tax authorities chose a route that was less confrontational, but more effective. Non-taxed gift allowance always offers employers and businesses the opportunity of incurring expenses that can be netted against taxable income for reducing the tax liability. There are several examples of reducing taxable incomes through generous non-taxable expenses. State-owned enterprises in China reportedly spend large sums on purchase of expensive liquor and also private cars for senior executives and declare the same as non-taxable allowances. By targeting a ?fringe? benefit such as expenditure on moon cakes for inclusion in tax calculations, authorities have sought to tap fairly large chunks of income that otherwise go untaxed.
Nonetheless, the tax has created considerable unhappiness. For residents of Nanjing, this is a double blow, coming on the back of another unpopular tax announcement. Adding spouses? name to a real estate property after marriage is now inviting contract tax in Nanjing. Nanjing is not an exception in this respect though. The cities of Chengdu, Qingdao and Wuhan have also introduced similar measures.
These innovative measures for increasing local government revenues are probably fuelled by steadily rising concerns over the high levels of local government debts in China. The National Audit Office (NAO) estimates aggregate local government debt in China at $1.7 trillion at the end of 2010. At its current level, the debt amounts to 27% of the country?s GDP.
Not only is the size of the debt large, a large part of the debt is nearing maturity. According to the NAO report, 41% of the total debt will fall due by 2012 with almost half of it up for repayment in 2011. Though the National Development and Reform Commission (NDRC) has allayed fears over debt defaults by provinces, it has also warned that some governments run the risk of bankruptcies if they don?t do strategic planning.
In the future, the bulk of strategic planning by local governments will focus on disciplining the large amount of loans that they pick up from banks. These have not only complicated their own debt profiles, but have also generated humongous non-performing loans for banks, adversely affecting their balance sheets. Beyond thinking through these loans, more strategic planning involves identification of new sources of revenue. Moon cakes and property appear clear favourites in this respect. Neither is expected to experience lower demand and both are good revenue earning prospects for debt-ridden local governments.
The author is a Visiting Senior Research Fellow in the Institute of South Asian Studies (ISAS) in the National University of Singapore (NUS). These are his personal views