But Zhang's former classmate, Xu Chao, who runs a private firm and earns about 30,000 yuan (US$3,614) each month, rarely pay the tax.

"I just don't understand why the less you earn, the more you pay (personal income tax)," said Zhang, who worked for a State-owned company.

Zhang's complaint was common among ordinary wage-earners, who believed they were treated unfairly.

The complaint suggests that China's existing personal income tax system has not helped narrow the gap between rich and poor, said Ni Hongri, a senior researcher with the Development Research Centre under the State Council.

The income gap between the rich and poor in China has been expanding along with the rapid development of the country's economy, official statistics show.

The Gini Coefficient, an international index used to measure income inequality between groups of people, stands at about 0.458 in China, greater than the international warning line of 0.4. This means that Chinese society has entered the zone of income distribution inequality.

An earlier report said that China's rich people, which accounts for less than 20 per cent of the country's total population, owned more than 80 per cent of the country's bank deposits last year.

But their personal income taxes were less than 10 per cent of the total.

Among China's tax-paying groups, salaried people rank first place and foreign expatriates second.

"Collecting taxes from salary-earners is much easier as employers are required to debit the tax directly from salaries and make payments to the government," said renowned economist Hu Angang at Tsinghua University.

Private-business owners lag behind these two groups, he said.

In cities, people who earn lower incomes have a heavier tax burden than those who make more money, Hu said. "China's richest people have the smallest tax burden in the world."

China's personal income tax rates vary in 11 categories based on income sources - and this system does not have much control over an individual's total annual income.

"Out-salary incomes are usually not taxed, unless people declare the income themselves - but the procedure to declare income is usually very complicated and needs a lot of time," Ni said.

Zhang Peisen, a senior researcher with the Taxation Research Institute under the State Administration of Taxation, said: "There is an urgent need for reform of the personal income tax system, because the system has many loopholes which tax evaders exploit."

The most common is for business owners to show personal spending as company expenditure.

Some even include their personal incomes in enterprises' turnover to evade personal income taxes that are usually higher than corporate taxes.

According to tax laws, the extra amount is subject to taxation if the income is more than 800 yuan (US$96) a month.

In some companies with high salaries, it has become common practice for people to get their income, sometimes several thousand yuan a month, in several installments, each less than 800 yuan (US$96), to avoid taxation.

"All residents with monthly income of more than 800 yuan (US$96) have the responsibility to pay personal income taxes," Ni said.

In developed countries, people usually declare their monthly income or quarterly income to the tax bureau and pay income taxes on time.

"If they were found evading taxes, they would be fined heavily, and even face bankruptcy," Ni said.

Compared with foreign countries, China's personal income tax system was still in a period of infancy, she said.

"The loopholes in the current tax law provided great opportunities for people to evade taxes," she said.

This may explain why some rich people are reluctant to pay taxes, she said.

Twenty-five years ago, when China was a planned economy, the State did not levy any tax on individuals, as incomes were too low.

It was only in 1980 when the country embarked on economic reforms that the Law of Personal Income Taxes was made. And it was not until 1994 that a systematic and regular taxation system was eventually put into force.

"In the following years it became clearer that the 1994 taxation reform was not perfect, and more improvements are needed," Zhang Peisen said.

Taxation is aimed at people with high-level incomes to promote economic development and social stability, he said.

As a result, the current 800-yuan (US$96) starting point for taxation on monthly income needs to be raised, Zhang said.

Personal income tax should also be based on a combination of various means of incomes, including bonuses and dividends, instead of merely salaries like today.

Meanwhile, the personal circumstances of an individual, such as supporting children and the elderly, may be considered before the tax is computed.

And personal income used for medicare, insurance and education may be exempted when calculating tax.

But China has difficulties at present in reforming the personal income tax system, because the government has a lot of basic work to do, Ni said.

"How does the government manage to control the overall income of a person?"

The government also needs to establish a nationwide network to record people's incomes and other information.

"It would take at least three to five years to finish the base work," Ni said.

The government is now beefing up supervision over high-income people and high-income industries.

In Beijing, local taxation bureaux have tracked down 30,000 tax payers whose annual income surpasses 100,000 yuan (US$12,048).

In South China's Guangzhou Province, special documents for taxation of more than 14,000 people had been filed by the end of July.

Business tycoons, lawyers, accountants, actors, singers and football stars are on the list.

"This was an important step taken by the government under the circumstances, recognizing that the system could not be approved soon," Ni said.

In an effort to cultivate respect for the law, Beijing officials will also keep children informed of the issues at stake during activities scheduled for September.

"We're planning to encourage people to become more socially minded by raising awareness of ethics and fostering people's respect for the law and willingness to contribute to public revenue," said an official with the Beijing Taxation Bureau.

The official, who declined to be identified, said some activities will specially target children, especially middle-school students, to foster their sense of responsibility to pay tax.

Personal income tax received by the State has been growing annually at a rate of 48 per cent since 1994, revealed figures from the State Administration of Taxation.

The country received 841.3 billion yuan (US$101.3 billion) in tax revenue in the early half of the year, a 10.9 per cent growth on the same period last year.

And experts anticipate that China's personal income tax will witness continuous fast growth in the wake of the country's WTO entry.

(a >China Daily September 2, 2002)