(Yicai) Aug. 4 -- China plans to reintroduce tax on bond interest income in a surprise move that could boost government coffers by as much as CNY31.6 billion (USD4.4 billion) this year.

A 6 percent value-added tax will be levied on interest income from newly issued treasury bills, local government bonds, and corporate notes from Aug. 8, the Ministry of Finance and the State Taxation Administration announced on Aug. 1. 

Bonds sold before Aug. 8 will remain exempt until maturity. The preferential policy for ‘small’ taxpayers will also be retained, allowing individuals to earn VAT-free interest income on bond purchases up to CNY100,000 (USD13,930) a month. 

The tax exemption on interest income was introduced in the 1990s to spur growth of the bond market and aid fundraising. China’s bond market is now the world’s second largest, and officials have said that the exemption has fulfilled its purpose.

First-half fiscal revenue fell 0.6 percent from a year earlier to CNY13.5 trillion (USD1.9 trillion), with tax revenue falling 1.2 percent to CNY9.3 trillion, according to finance ministry data. Fiscal expenditure in the same period surged 9 percent to CNY18.8 trillion, with the fiscal deficit expanding 45 percent to CNY5.3 trillion.

The government tax take may increase by about CNY31.6 billion (USD4.4 billion) this year following the move, according to calculations by Yang Yewei, chief fixed income analyst at Guosheng Securities.

Commercial banks will bear brunt at about CNY23.3 billion, followed by funds and wealth management products at about CNY3.4 billion, Yang said. 

Given that new bond issuance is set to increase in the next few years, the tax income from the new policy will also mount, growing to CNY64.8 billion (USD9 billion) next year and CNY98.8 billion in 2027, according to Sun Binbin, chief economist at Caitong Securities. 

Last year, China sold CNY12.4 trillion (USD1.7 trillion) of treasury bonds, a rise of 12 percent on the year before. Local government bond issuance amounted to CNY9.8 trillion, up 5 percent, and corporate bond sales reached CNY10.4 trillion, a 2 percent gain, per data from the People’s Bank of China.

Editors: Dou Shicong, Tom Litting