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Tax policy affects market

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The release of the detailed rules to collect tax on the net income from second-hand housing transactions shows that the taxation authorities are taking real action to help cool down the property market.

In May, the State Administration of Taxation promised it would soon clarify how it would implement the tax policy. This latest development shows it has put its money where its mouth is.

The administration said the move is simply to collect a tax it should have started to bring in long ago. In 1994, the State made it clear that net incomes from second-hand housing transactions should be taxed at a rate of 20 per cent.

It may be true that the administration does not intend to go so far as to influence the property market. But the move will have a profound impact on the second-hand housing market.

As the new measure kicks in, it will directly cut sellers' profits. The supply of second-hand housing may be reduced. Sellers, as usual, may shift the tax burden to buyers, who may need to pay more to buy a house. These two factors may temporarily increase the price of second-hand housing.

Another possibility is that property owners may keep their houses empty as they wait to cash in from further prices rise to offset the tax costs.

They may also rent their houses instead of selling them. The tax on renting is much lower and, given the current lax regulation, much easier to evade. This may also reduce the supply of second-hand housing.

As a result, homebuyers are likely to be the ones paying more.

Despite that adverse effect, the measure will significantly reduce speculative deals.

Speculation is believed to be one of the major causes of China's runaway house prices. Speculators would have to think twice before they start to hoarding houses.

The tax administration has clearly shown its anti-speculation stance by stipulating two circumstances in which second-hand housing sellers need not pay the tax.

While the tax policy will certainly work in reining in speculation, it will take some months to see to what extent the policy changes the market mood.

As far as the taxation body is concerned, its role is to establish, with the help of other departments, a comprehensive and connected housing information database to facilitate the collection of the tax.

An incomplete information network has caused problems for officials who have already been collecting the tax in a number of cities.

Their experience shows that steps must be taken to improve this network as soon as possible.

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