Water resource fees are about to become a thing of the past, replaced by water resource taxes.

On October 15th, the Ministry of Finance, the State Taxation Administration, and the Ministry of Water Resources issued the "Implementation Measures for the Pilot Reform of Water Resource Tax" (hereinafter referred to as the "Measures"), announcing that the comprehensive implementation of the pilot reform of water resource fees into taxes will start on December 1st, whereas previously this pilot was only carried out in 10 provinces. This reform, aimed at protecting water resources and promoting the conservation, intensive, and safe use of water resources, has taken the most crucial step. The most pressing concern for the public and businesses is: after the conversion of water resource fees into taxes, will water prices rise?

Bai Yanfeng, a professor at the School of Fiscal and Taxation of Central University of Finance and Economics, told First Financial that this comprehensive pilot of water resource tax follows the principle of "smooth transition". Under the premise that the water usage habits of the public do not change significantly, the burden of water usage is expected to remain generally stable. Of course, an important starting point of this reform is to play the regulatory and guiding role of the tax lever on the efficient use of water resources. For businesses that prioritize water conservation and continuously improve water use efficiency, it will be beneficial, while for those who do not, it will increase their overall burden.

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Water resource tax has been promoted nationwide over 8 years.

Previously, China adopted a fee system for water resources, but starting in July 2016, 10 provinces including Hebei, Beijing, Tianjin, Shanxi, Inner Mongolia, Shandong, Henan, Sichuan, Shaanxi, and Ningxia initiated the reform of water resource fees into taxes. Now, with the introduction of the "Measures", all 31 provinces will replace the previous fees with water resource taxes starting in December.

According to the "Measures", except for a few special cases, units and individuals who directly extract surface water or groundwater in China are taxpayers of the water resource tax and should pay the tax as stipulated. Generally, the water resource tax is determined by multiplying the amount of water extracted by the applicable tax rate, and the specific applicable tax rate is determined by each province. However, the state has set a minimum average tax rate for each province. For example, in 13 provinces including Sichuan and Shanghai, the minimum tax rate for surface water cannot be lower than 0.1 yuan per cubic meter, while for Beijing, this standard is 1.6 yuan per cubic meter.

Why promote the reform of water resource fees into taxes nationwide? This is because China is facing a shortage of water resources, and the water resource fees cannot effectively promote water conservation, while water resource taxes can reverse this situation.

Currently, China's per capita water resources are far below the world average and are unevenly distributed. Sixteen provinces are facing a water resource crisis, and as many as 300 cities are suffering from varying degrees of water scarcity.

Yang Deqian, the chief expert at the Local Fiscal Performance Research Center of Jimei University, told First Financial that the management system of water resource fees is relatively chaotic. For example, multiple departments manage water, the fee collection standards vary greatly, and the fees have not been used for specific purposes. Water resource fees have not been fully collected. Due to the lack of effective collection and management, the collection rate in most provinces is below 70%. In addition, the legal level of water resource fees is relatively low, and there is a lack of authority and enforceability in the implementation. Overall, the implementation effect of the water resource fee system is poor, and it is necessary to reform the water resource fees into taxes.

The above-mentioned 10 provinces that have piloted the reform of water resource fees into taxes have achieved significant results. Relevant responsible persons from the Tax Policy Department of the Ministry of Finance and other departments said,Ten provincial pilot reforms have achieved significant results in curbing over-extraction of groundwater, transforming water usage methods, promoting water-saving modifications, and standardizing water extraction and usage behaviors.

For instance, Hebei, the first pilot province to reform water resource fees into taxes, is the only province in China without any major rivers passing through, making its water resources extremely scarce and its groundwater over-extraction severe. After the reform, the tax regulation's leverage effect on water resources has been evident, with Hebei's water usage per ten thousand yuan of GDP dropping by 40% over eight years; the volume of groundwater extraction also decreased by 44% over the same period. The province has shut down and sealed 294,000 self-supply wells, leading to a continuous optimization of the water extraction and usage structure.

The person in charge stated that the comprehensive implementation of the water resource fee-to-tax pilot fully leverages the tax lever's role, which is beneficial for enhancing the water-saving awareness and motivation of enterprises and other social entities. It encourages enterprises to improve water usage efficiency through water-saving modifications and technological innovation, promotes the conservation, intensive, and cyclical use of water resources, and protects the ecological environment. This approach fosters the development of green lifestyles and methods. Moreover, the water resource fee-to-tax pilot complements and synergizes with other reform measures such as groundwater over-extraction management and water extraction permit management, which helps to implement rigid water resource constraint systems and全面提升 the level of water resource conservation, intensive use, and safe utilization.

How will the tax burden for residents and enterprises change?

The water resource fee-to-tax reform is about to be promoted nationwide. For the ten provinces that have already piloted the reform, the impact will be relatively small. However, residents and enterprises in the other 21 provinces that have not yet implemented the pilot are very concerned about changes in their tax burden.

A key factor affecting the change in tax burden still depends on the final applicable tax rate standards to be determined by the provinces that have not yet piloted. However, one of the main principles of this reform is to achieve a smooth transition while strengthening differentiated control. Higher tax rates are set for water extraction and usage in areas with severe water resource shortages and overload, as well as for the extraction of groundwater, to better leverage the regulatory role of taxes and curb over-extraction of groundwater and irrational water demand.

Bai Yanfeng stated that from the perspective of the early pilot reforms, the water resource fee-to-tax reform will mostly adopt the principle of "tax burden transfer." For general enterprises and residents, there will be no significant change in actual burdens, and the price of water for the public will remain stable. However, to enhance the intensive use of water resources, water-saving enterprises will be encouraged, while enterprises with high water resource consumption and extensive development will be further restrained. This is the original intention and direction of the reform.

For example, in provinces like Hebei and Inner Mongolia that have previously carried out the water resource fee-to-tax pilot, the burden of normal domestic water usage, agricultural water usage, and general industrial and commercial water usage for local residents remained unchanged after the reform, in line with the pre-reform levels. However, Hebei increased the groundwater tax rate for high-water-consuming special industries such as golf courses, car washing, and bathing by more than 15 times compared to before the reform. Inner Mongolia implemented a tax rate for groundwater extraction in severely over-extracted areas and over-extracted areas at three times and two times the rate of non-over-extracted areas, respectively; it also imposed an additional 1 to 3 times water resource tax for exceeding planned or quota water usage.

The person in charge stated that the water resource tax is implemented with differentiated tax rates based on water resource conditions, types of water extraction and usage, and economic development. The state uniformly clarifies the minimum average tax rate standards for water resource tax in each province, autonomous region, and municipality directly under the central government, with the specific applicable tax rates determined by each province, autonomous region, and municipality. At the same time, it is required to set higher tax rates for groundwater extraction, water extraction in areas with severe water resource shortages, and overload areas.

It is worth noting that the "Measures" clearly define the relationship between water resource tax and water supply prices. Urban public water supply enterprises are the taxpayers for the water resource tax, and the water resource tax is separated from the tap water price, guiding related enterprises to take measures to control and reduce water leakage through taxation.Under the pressure of this tax lever and the guidance of related preferential water resource tax policies, some enterprises have achieved a significant reduction in the tax burden on water resources through technological transformation and other means.

For example, Hebei Iron and Steel Group Shahe Zhongguan Iron Mine Co., Ltd. invested more than 71 million yuan in 2017 to introduce a nanofiltration membrane water purification treatment system, independently carried out technological research, and became the first metallurgical mining enterprise in China to master and apply backfill technology, achieving zero discharge of mining drainage water. In the past three years, the company's water resource tax has decreased by 70% year-on-year.

This reform of water resource fees into taxes has also been improved in institutional design compared to before. For instance, the tax payment location for water resources has been adjusted from the place of production and business operations to the location of the water intake. The local tax management authority has been expanded, such as adding new preferential tax policies that localities can reduce and exempt; simplifying the tax quota standards for water resources, and authorizing localities to have more adjustment space when determining specific tax quotas, etc.

To ensure the nationwide implementation of the reform of water resource fees into taxes, the Ministry of Finance and other three departments will strengthen policy interpretation to ensure that taxpayers understand the policy, know how to declare, and know how to operate. At the same time, a working coordination mechanism between tax and water conservancy departments will be established to hand over taxpayer files, develop and test tax collection information systems, and achieve automatic pre-filling and automatic calculation of tax-related information, further improving the convenience of taxpayers in handling taxes.

In addition, the three departments will also strengthen work guidance, track and analyze the operation of the reform pilot, summarize and evaluate the pilot effects in a timely manner, guide localities to implement work tasks and responsibilities, strengthen departmental cooperation, and ensure the smooth progress of the pilot work.