China’s Water Resource Tax Reform
By Yuanchao Xu 20 July, 2016
CWR's Xu on how China's just launched water resource tax compares to the fee system & on Hebei taking lead
To save water resources China started to collect water resource fees in 1988. This government non-tax income is specifically used for water conservation. However, there are some problems regarding the fee. According to, Zili Cai, head of the Department of Property and Behaviour Taxation of the State Administration of Taxation these problems include the lack of people’s awareness of paying fees and the lack of mandatory collection measures among others. He added that it’s necessary for the government to strengthen their control over water use through water taxation.
Problems with resource fees include the lack of people’s awareness to pay & collection measures
Recently, China launched a comprehensive reform on “resource fees to resource taxes”, with Hebei as the pilot province. On 9 May 2016, the ‘Interim Measures for the Pilot Reform of Water Resource Tax‘ (“Water Tax Interim Measures”) for Hebei province was issued by the Ministry of Finance (MoF), the State Administration of Taxation (SAT) and the Ministry of Water Resources (MWR). This is to replace the water resource fee system in place. The Water Tax Interim Measures is in force since 1 July 2016. Here are some points of note:
What is the difference between fees and taxes in China?
According to the explanation from the SAT, there are three main differences between fees and taxes:
From the above table we can see that fees and taxes are managed by different government bodies. It appears that taxes are standardised nationwide and are more flexible than fees. So why was Hebei province selected for the pilot?
Why Hebei province?
According to an interview of experts in China Financial and Economic News, Hebei province was likely selected due to its water scarcity levels and industrial structure.
As highlighted in the interview, the water resource per capita of Hebei province is only 1/7 of the national standard. Moreover, Hebei is facing severe groundwater over-extraction; a third of China’s total groundwater over-extraction is in Hebei.
A monthly report on groundwater from the MWR shows that in January 2015, the groundwater storage in the Hebei Plain decreased dramatically (about 4 billion m3) compared to January 2014. In January 2016, it continued to decrease by a further 2.2 billion m3, compared to January of 2015.
The government is trying to change this situation with the water resource tax.
Changes for Hebei province
Prior to the Hebei Water Tax Interim Measures, the ‘Procedures of Hebei Province on Collection, Use and Management of Water Resource Fees‘ (“Procedures of Water Resource Fees”), enforced on 1 February 2011, was the main water regulation for Hebei. However, with the new Water Tax Interim Measures, amendments have been made to this but it still exists. There also is the ‘Notice on Issues concerning the Standards for the Collection of Water Resource Fees‘ (“Collection Standard Notice”) since 2013 that set the province’s water resource fees.
The above regulations and the Water Tax Interim Measures have the following similarities:
- A water permit still needs to be applied for;
- The water resource rate is calculated according to the amount of water use;
- The minimum water resource tax rates are the same as water resource fees in Hebei:
- RMB0.4/m3 for surface water
- RMB1.5/m3 for groundwater
- RMB0.005/kWh for hydropower or once-through cooling type thermal power water use (as published in 2011);
- Agricultural water use within a planned quota is exempt;
- In the case of the overuse of agricultural water and domestic water, a reduced rate is applied;
- For recycled mine water use and recycled geothermal air conditioning water use, a reduced rate is used; and
- Recycled wastewater and reclaimed water are exempt.
And now for the main differences:
- Hebei’s water resource fee rate is now zero (one of the amendments to the prior fee regulation. The fee rate is now replaced with a tax rate;
- The water resource tax will be collected by local tax authorities instead of the local water administration or catchment administrations;
- A cooperation mechanism on tax collection between Water Administrations and local Tax Authorities shall be established. The Water Administrations shall provide details on the issuance of water permits and any overuse above the allowed quotas. They will also help check submitted water-related information from companies to the Tax Authorities;
So what does the Water Tax Interim Measures mean?
The ‘Notice on Comprehensively Promoting the Reform of Resource Tax‘, published simultaneously with the Water Tax Interim Measures, states that water extraction involves a lot of aspects and is complicated to handle. In order for a smooth and orderly reform, the Water Tax Interim Measures is enforced firstly in the pilot province Hebei.
The SAT says the normal industrial and domestic water use cost will remain the same as before. However, we can still gage some potential changes from the Water Tax Interim Measures.
First is about the enforcement of the Water Tax Interim Measures. In 2013, the Collection Standard Notice provided minimum water resource fee rates for different provinces, and said it is “to be enforced in principle”; while the rates remain the same in the Water Tax Interim Measures, but the wording has changed to “to be enforced”. Together with the characteristics of a tax, “normative and mandatory“, it seems, this time, the Water Tax Interim Measures is to be enforced strictly.
Enforcement is likely to be more strict…
And, water resource taxes for groundwater over-extracted regions & severely over-extracted regions can be 5 times higher
The second is regarding groundwater. The Procedures of Water Resource Fees says for water use in groundwater over-extracted regions, the water resource fee is doubled; for water use in groundwater severely over-extracted regions, the water resource fee is tripled. However, in the Water Tax Interim Measures, the water resource taxes in groundwater over-extracted regions and severely over-extracted regions can be 5 times the normal rate. Specific rates shall be proposed by the People’s Government of Hebei Province, and then fixed by the MoF and relevant departments; if the proposed rate is higher than 5 times the normal rate, it should be reported to the State Council.
Specific rates are still missing at the moment but the increased range for water resource tax rate indicates that companies in groundwater over-extracted and severely over-extracted regions could face costs.
Looking elsewhere: Water resource tax experiences in Europe
Many European countries have water resource taxes at various levels. Unsurprisingly, results indicate that high water resource tax rates can have a positive impact on water conservation.
High tax rates have a positive impact on water conservation
The Netherlands was the first country to start collecting water resource taxes, including a surface water pollution tax in 1970 and a groundwater tax in 1981. According to Chinese researchers1, with the introduction of the surface water pollution tax in the Netherlands, pollutant discharge decreased greatly. Most of the companies taking part in the research said their reduction was due to this tax. As for the Netherlands’ groundwater tax (EUR0.1785/m3), after its introduction both industrial and domestic water use decreased. Thus the researchers concluded that the tax effectively contributed to groundwater conservation.
Denmark has one of the highest water tax rates globally (EUR0.7/m3). About 99% of drinking water in Denmark come from groundwater. As part of the tax reform in 1994, water resource tax was enacted to secure water resources and avoid over-extraction. The tax has lowered domestic water use.2
Germany and the UK also have water resource taxes. However, due to low tax rates (EUR0.005-0.006/m3 for Germany and EUR0.006-0.03/m3 for the UK), they have almost no effect on water conservation.2
The water tax reform could be a solution for not just Hebei’s depleting groundwater but also water pollution
As one of China’s most water-scarce provinces, Hebei is leading the way for the country’s new water resource tax, a stricter and more comprehensive measure. Although differences between the old fees and new taxes are not great at the moment, there are positive signals towards a stricter enforcement. On top of groundwater depletion, Hebei is also facing pollution which threatens groundwater. According to Chinese experts, 91% of Hebei province is located in the most polluted river basin in China, the Haihe Basin. With more specific measures and tax rates still to come, the water resource tax may be a solution for the groundwater woes in Hebei.
1 Ren, T. & Wang, G. Enlightenment of Netherlands’ water resource taxation on China’s water resource taxation. Jiangsu Commer. Forum 86 (2010).
2 Wu, L., Zhu, H. & Peng, Z. Experiences and references of water resource taxation of European Countries. World Agric. 58–61 (2016). at <https://www.cqvip.com/qk/94505x/201603/668061093.html>
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