Recently, a new rule governing the Individual Income Tax (IIT) in China has been announced to stimulate current economic activity by putting more cash in the pockets of recent graduates, interns, and new employees.

The State Taxation Administration (STA) issued Announcement 13 that aims to adjust the IIT withholding method for certain taxpayers. The new policy affects both domestic and foreign tax residents of PRC, who have recently graduated and are about to enter the job market, current students who are pursuing an internship in China, and those who are employed for the first time in this fiscal year.

The announcement effective date is July 1, 2020. The policy goal is to ensure that those entering the workforce will effectively receive higher monthly income. This has become possible by increasing the amount of personal deduction when calculating IIT to be withheld for each month. Starting from July the 1, 2020, the adjusted formula is applied to the monthly cumulative personal deduction, as if employment took place at the beginning of the calendar year, instead of the actual date when the employee was hired.

Prior to July 1, 2020, cumulative personal deduction for current month equaled to RMB 5,000/month * the number of months in employment with the current employer. Starting from July 1, 2020, the cumulative personal deduction for each month equals RMB 5,000/month * the number of months of the calendar year to-date.

Documents such as a university diploma for new employees, a student card for interns, or a commitment letter from taxpayers receiving income for the first time in a year can be used to qualify for the new policy. The same requirements apply to foreign employees who have recently commenced their employment after graduation and can be considered tax residents in China. The taxpayers are free to decide whether they would like to comply with the announced policy initiative.

This new policy will have positive impact on the new workforce by increasing the monthly disposable income they have on hand, even though the positive impact is just on the first calendar year of employment. With a 3.2% GDP growth in the second quarter, China’s growth is expected to accelerate even further along this year, and this new announcement demonstrates again the strong commitment to stimulating economic policies in order to boost the economic recovery.