Why is the water resource fee-to-tax pilot program fully expanded- What impact will it have on businesses and residents- Expert interpretation →

Recently, the Ministry of Finance, the State Administration of Taxation, and the Ministry of Water Resources jointly released the “Implementation Plan for the Pilot Reform of Water Resource Tax,” which will roll out nationwide starting December 1 of this year. This plan outlines specific provisions concerning water resource tax taxpayers, tax calculation basis, tax rates, and tax incentives.

What’s the rationale behind the nationwide expansion of the pilot reform from water resource fees to taxes? To gain insights, we consulted experts.

According to reports, China faces significant water scarcity, with average per capita water resources significantly below the global average and unevenly distributed across provinces. Many regions suffer from severe water shortages. To enhance societal awareness of water conservation and protect water resources, the role of taxation is crucial. Prior to 2016, China imposed water resource fees on entities and individuals to encourage rational use of water resources and promote conservation.

Fan Yong, the Dean of the School of Finance and Taxation at Central University of Finance and Economics, explained, “Water resource fees lacked the uniformity found in tax laws. Although there was some flexibility, deviations and inconsistencies occurred during implementation.”

In 2016, China initiated pilot reforms transitioning from water resource fees to taxes, with Hebei province, known for severe water shortages, as the first to implement this change on July 1. By the end of 2017, nine additional provinces and municipalities—including Beijing, Tianjin, Shanxi, Inner Mongolia, Shandong, Henan, Sichuan, Shaanxi, and Ningxia—joined the reform pilot program. The Resource Tax Law passed in 2019 legally formalized the transition from fees to taxes.

Fan Yong noted, “The pilot reforms across the initial ten regions improved the overall structure of water use and enhanced efficiency, yielding significant results and laying a strong foundation for nationwide implementation.”

What specific elements does the new plan clarify?

The newly implemented “Implementation Plan for the Pilot Reform of Water Resource Tax” specifies tax rates, exemptions, revenue allocation, and tax administration. How does it differ from previous pilot reforms?

In alignment with the Resource Tax Law, the plan shifts the tax liability location from the site of production to the location of water extraction, providing clearer definitions of the taxation scope and targets.

Fan explained, “Taxes are now levied at the point of water extraction, ensuring that funds are used locally for protecting water resources and managing water pollution, reflecting the principle of origin. This adjustment also reduces water loss during transportation and improves efficiency.”

Furthermore, the plan sets differential tax rates based on the state of water resources, types of water usage, and economic development. Notably, it stipulates higher tax rates for areas with severe water shortages, particularly where groundwater extraction is prevalent.

Fan added, “Places that face significant water shortages and rely heavily on groundwater can impose higher tax rates, aligning with our goal of regulating water resources through economic measures.”

Additionally, the plan highlights tax exemptions for agricultural water use within prescribed limits, while allowing local authorities to waive taxes on excess agricultural water usage and rural centralized drinking water projects. Tax reductions are also available for entities demonstrating efficient water usage that meet national standards.

Fan noted, “Given the fundamental reliance of agriculture on water, this sector benefits from tax exemptions. In contrast, we encourage non-agricultural industries to improve water efficiency, offering tax reductions as an incentive.”

Moreover, the plan states that after the comprehensive implementation of the reform, all revenues from water resource taxes will be allocated to local authorities, enhancing local financial autonomy.

What impact will the transition from fees to taxes have on businesses and residential water usage?

As the nationwide reform takes effect, will the cost of water for residents increase? The plan clarifies that water resource tax liabilities incurred by urban public water supply companies will not be included in tap water pricing but rather detailed separately in the comprehensive water price, where they can also be deducted from the value-added tax basis. During the pilot period, provincial development and reform departments, in coordination with relevant entities, will gradually adjust the structure of the comprehensive water price, ensuring no additional burden on water consumers due to the reform.

Fan emphasized, “Our design aims to ensure that urban and rural residents will not see an increase in their water costs, as the financial burden will remain unchanged within the taxation framework.”

Experts explained that the differential tax rates will exempt unconventional water sources, such as treated wastewater, recycled water, and rainwater, to genuinely motivate enterprises to adopt environmentally friendly water practices. Conversely, high-water-consuming industries, such as golf courses, car washes, and spas, will see significant increases in their tax liabilities.

Fan stated, “Industries that engage in high water consumption and lack efficient resource utilization will face substantial hikes in their resource tax. This acts as reverse motivation, prompting companies to improve their production technologies and methods, ultimately leading to more sustainable and efficient water use.”