SHANGHAI: Personal income tax rebates for house buyers have ended after five years of practice, raising fears it will hurt urban development in the long run.

"The city has confirmed real estate as a pillar industry and social investment is viewed as a sustainable and powerful source fuelling the development of the city," said Yin Kunhua, a professor at Shanghai University of Finance and Economics and an expert on real estate industry.

"However, that is easier said than done. Shanghai has not yet taken into serious consideration how to fulfil these two aspects."

The city then adopted the policy of personal income tax rebates to house buyers from June 1, 1998, but the duration was limited to five years.

"The policy is not the only contributor to the prosperity of the real estate industry, but it is an international practice and it influences the psychology of tax payers very much," Yin said.

The policy played a significant role in the fast development of this industry in past years.

In 1998, the completed area of commercial apartments reached 14 million sqm (square metres) but fewer than 8 million sqm were sold. The sales area exceeded 12 million sqm in 1999 and has kept growing steadily since then. Last year, the completed area and units sold both exceeded 18 million sqm.

Sources from the tax bureaux stated that if they knew the real estate market would be so hot then they would not have adopted the rebate policy. It has let a huge amount of money slip away, they said.

Some criticized the policy because only 20 per cent of high-income buyers benefit from it. For medium and low-income households, the five-year tax return is only a small part of the outlay when buying an apartment.

Some people did buy apartments to solve their living problem and secure the tax rebate while others bought more than one apartment and then rented it out. This pulled up the housing price in general.

Thus the gap between the rich and the poor kept getting wider.

The policy was adopted in Shanghai only. Other areas that could not provide a rebate to house buyers because of their low economic levels sought support from the central government.

Yin said the end of the policy will frustrate house buyers but only to a limited extent as house prices will continue to increase and purchasing will remain popular.

But those who were planning to buy apartments for the sake of investment are likely to turn away from the real estate market to other sectors. This would be a negative trend because a mature real estate market depends on an active rental sector instead of the supply and demand of new apartments because land resources of the city are limited.

The contribution of the real estate industry to the city's development is undoubted and the government should continue its support to the industry to achieve all-round prosperity, he said.

In a meeting with officials of the Shanghai Municipal Planning and Development Commission, Yin asked them to consider continuing this policy. He said the government should make further efforts to encourage people to spend their money on housing to drive the whole economy.

The government should consider offering bank allowances for several years to medium and low-income people such as new graduates, young couples and relocated households when they buy their first apartment.

"The government, especially the tax bureaux, should not only focus on the benefits or losses," Yin said. "They shall realize that only when people become rich will the government become strong."

As the developers always transfer cost to the housing price, the government should consider cancelling several unreasonable charges. One is the 60 yuan (US$7) per construction sqm for civil defence purposes and the other is the 320 yuan (US$39) per construction sqm for facilities such as vegetable markets, kindergartens or libraries around the residential complex.

"The two charges were developed during the planned economy and it is time to eradicate them and relieve the burden of house buyers a little," Yin said.

(Business Weekly 06/10/2003 page9)