Local Additional Tax Law Accelerated in Development Experts: Local Governments Urgently Need New Tax Types

Questioning AI · How will local additional tax laws and consumption tax reform coordinate to balance interests?

Reporter Du Tao

On March 30, the Ministry of Finance released its Annual Report on the Construction of a Law-Based Government in 2025. In the section on 2026 work arrangements, it clearly states that it will do a good job in the formulation and revision of laws and regulations such as the Budget Law (amended), the Local Additional Tax Law, the Resource Tax Law (amended), and the Regulations on Penalties and Disciplinary Actions for Fiscal Violations (amended).

Ye Yongqing, a partner at Anyi Law Firm, told the Economic Observer that, in accordance with Article 11 of the Legislation Law of the People’s Republic of China, basic tax systems—such as the establishment of tax categories, the determination of tax rates, and tax collection and administration—may only be formulated through legislation. Including the Local Additional Tax Law in the Ministry of Finance’s 2026 legislative plan means that the country will officially initiate the “fees-to-tax” process for this portion of fiscal revenue. This indicates that the law has entered the substantive drafting stage by ministries and commissions under the State Council. Overall, it is also a trend and an important manifestation of tax rule of law. It is reasonable to infer that the Local Additional Tax Law will be implemented and imposed as early as January 1, 2028; of course, given the current situation of local fiscal revenue, there may also be an earlier start.

The first proposal for the local additional tax was made in the July 2024 “Decision of the CPC Central Committee on Further Deepening Reform in an All-Round Way and Advancing Chinese-Style Modernization,” which mentioned “studying the merging of the Urban Maintenance and Construction Tax, the Education Surcharge, and the Local Education Surcharge into a local additional tax, and authorizing local governments to determine specific applicable tax rates within a certain range.”

In 2011, the “Opinions of the State Council on Further Increasing Fiscal Education Spending” clarified that the Education Surcharge is uniformly levied at 3% of the actual tax amount paid for VAT, the consumption tax, and the business tax. The Local Education Surcharge is uniformly levied at 2% of the same base.

According to data from the Ministry of Finance, in 2025 the Urban Maintenance and Construction Tax will be 5170 billion yuan. According to the “Announcement on Matters Such as the Determination of the Taxation Basis for the Urban Maintenance and Construction Tax,” jointly issued by the Ministry of Finance and the State Taxation Administration in 2021, the basis for calculating the Urban Maintenance and Construction Tax is the VAT and consumption tax amounts actually paid by taxpayers according to law. The basis for levying the Education Surcharge and the Local Education Surcharge is consistent with that for the Urban Maintenance and Construction Tax.

At present, the authorities have not disclosed the size of the Education Surcharge and the Local Education Surcharge. However, since the Education Surcharge and the Local Education Surcharge use VAT and the consumption tax as their tax base, they are taxed at a combined rate of 5%. In 2025, domestic VAT revenue and domestic consumption tax revenue total 85804 billion yuan. Based on a 5% rate estimate, the revenue size of the Education Surcharge and the Local Education Surcharge is about 4290 billion yuan. Adding the Urban Maintenance and Construction Tax revenue of 5170 billion yuan, the total revenue would be 9460 billion yuan, approaching one trillion yuan.

Ye Yongqing believes that after the “replacing business tax with VAT” reform, local governments lack independent principal tax categories and mainly rely on revenue from fiscal-sharing taxes. If the merged “local additional tax” has a theoretical annual revenue size approaching one trillion yuan, and it is elevated to law and granted local pricing authority, it means that under current circumstances, local governments will obtain the third-largest stable source of local revenue, after the fiscal sharing of VAT and corporate income tax—fundamentally alleviating the pressure on fiscal operations at the grassroots level.

“On the other hand, considering the local tax attributes of the local additional tax, this reform also needs to coordinate overall issues such as the legislation and collection of property tax and the localization of the consumption tax, so as to form a systematic foundation for local fiscal revenue and change the existing local fiscal system that heavily depends on land, thereby paving the way for reforms of other systems,” Ye Yongqing said.

The “Report on the Implementation of the 2025 Central and Local Budgets and the Draft 2026 Central and Local Budgets,” released during this year’s Two Sessions, also mentions strengthening the local tax system, promoting reform of the local additional tax, adjusting and optimizing the scope and tax rates of consumption tax collection, and advancing the shifting of certain collection links.

Ye Yongqing analyzed that legislation for the local additional tax must wait until the dust settles on the legislation for the principal tax categories. With the official implementation of the “VAT Law of the People’s Republic of China” on January 1, 2026, the largest tax base for the additional tax has been fully legalized, which directly triggers an acceleration of the Local Additional Tax Law in 2026.

“On the other hand, as China’s ongoing consumption tax reform progresses, if it is shifted from the production stage to the wholesale or retail stage, it will move a huge consumption tax base from ‘production provinces’ to ‘consumption provinces.’ Since the additional tax is a ‘subsidiary of the principal tax,’ this also means that the revenue attribution of the additional tax will undergo a major geographical shift. Therefore, the initiation and the specific implementation rules of the local additional tax law must maintain a high degree of policy coordination with reforms such as the consumption tax law, in order to balance the allocation of fiscal interests among different provinces,” Ye Yongqing said.