Chinese legislators are discussing a draft amendment to the country's tax law that will offer tax relief for low-income households as the country strives to tackle income disparities and offset the impact of rising living costs.

Lawmakers began to deliberate the draft amendment to the Personal Income Tax (PIT) Law for the first time on Wednesday. The draft will increase the minimum threshhold for personal income tax from 2,000 yuan (306 U.S. dollars) per month to 3,000 yuan and cut the number of income tax brackets from nine to seven.

The changes are part of China's attempt to use taxation as a leveraging effect for income distribution, according to Finance Minister Xie Xuren. The changes are taking rising living costs into account, Xie told lawmakers at the ongoing bimonthly session of the Standing Committee of the National People's Congress.

China currently uses a nine-bracket progressive rating system, which applies a minimum tax rate of five percent to those who earn between 2,000 yuan to 2,500 yuan per month, and a maximum rate of 45 percent to those whose earnings exceed 102,000 yuan per month. Those who make less than 2,000 per month are not taxed.

According to the draft, the minimum tax rate of 5 percent will be applied to those whose monthly salaries range from 3,000 yuan to 4,500 yuan. The peak rate will apply to those who make more than 80,000 yuan per month.

Raising the minimum PIT threshhold will benefit more than 200 million working class people in China, said Sun Qunyi, secretary general of the labor and wage committee under the China Association for Labor Studies, a non-profit academic institution.

Only about 12 percent of the working class will have to pay taxes if the tax threshhold is lifted, down from the current 28 percent, Xie Xuren said.

The increase in the tax threshhold is estimated to cut the country's personal income tax revenue by about 109 billion yuan this year, in comparison to last year's tax revenue, according to Xie Xuren.

The reduction in the amount of personal income taxes levied, however, will have limited impact on China's fiscal revenue, which relies heavily on turnover taxes, said Sun Qunyi.

Personal income taxes totalled 483.7 billion yuan in 2010, accounting for 6.3 percent of the country's tax revenue, Xie said in a report delivered at Wednesday's meeting.

"The threshhold increase will definitely ease pressure brought about by inflation and stimulate domestic consumption," said Zhang Peisen, a researcher of taxation policies at a research institute under the State Administration of Taxation.

Analysts believe China's retail sector will benefit greatly from the change in the country's PIT structure.

China began to collect personal income taxes in 1980, with a threshhold of 800 yuan. This threshhold was doubled in 2006 and was raised again in 2008 to 2000 yuan.