Key Objectives and Scope of the Reform

The pilot reform seeks to promote the efficient use, conservation, and protection of water resources across multiple sectors, with a core emphasis on sustainability and environmental security. Units and individuals drawing surface or groundwater within China are designated as taxpayers under this new policy, and they are required to secure water permits per the Water Law. By applying taxes on water usage, the government intends to create financial incentives that encourage industries and individuals to manage water use more effectively, reduce waste, and preserve this essential resource.

Exemptions are in place to balance economic needs with conservation goals. For example, rural organizations, households drawing water for basic needs, and emergency services taking water for public safety are exempt. This approach reflects a strategic focus on regulating industrial and high-demand uses, while ensuring that essential and low-impact needs remain unaffected by the tax.

Tax Structure and Calculation

The reform introduces a robust framework for tax calculation and collection. The taxable water sources include both surface and groundwater, while alternative sources like rainwater harvesting, desalinated seawater, and reclaimed water are excluded. The tax rate depends on multiple variables, including the type of water drawn, the economic profile of the region, and the local conservation requirements. The calculation follows a systematic formula:

• Standard Water Withdrawal: The tax is based on actual water withdrawn, with adjustments for reasonable leakage rates.
• Hydropower: Hydropower facilities will pay a tax based on their electricity generation, rather than water withdrawal volume.
• Thermal Power Cooling: For thermal power plants, the tax can be based on either the amount of water consumed or electricity produced, with flexibility for local authorities to decide the method.

For certain industries and special uses, like car washes and golf courses, taxes are set at higher rates to discourage excessive or non-essential water usage. Additionally, regions with severe water scarcity will see higher tax rates for groundwater extraction to mitigate resource strain.

Variable and Region-Specific Tax Rates

The reform allows regional governments flexibility in determining the tax rate for different water resources, depending on local economic conditions, development levels, and resource availability. A core principle of the policy is that the tax on groundwater will be higher than that for surface water due to the increased impact of groundwater extraction on the environment. Rates are also expected to be higher in regions where water resources are heavily stressed or depleted.

Furthermore, unauthorized water withdrawals or excess withdrawals beyond permitted limits are subject to an increased tax rate. This provision is aimed at discouraging unauthorized water use and ensuring that all withdrawals align with local conservation efforts.

Incentives and Exemptions to Support Conservation and Key Sectors

To balance resource conservation with economic stability, the reform includes various tax incentives and exemptions:

• Agricultural Production: Water used within prescribed limits for agricultural production is exempt from the tax, recognizing the essential role of water in food production and rural development.
• Military and Emergency Services: Exemptions apply to military, national fire rescue teams, and other entities involved in public safety and essential services.
• Pumped Storage Hydropower: Water used in pumped storage power generation, a renewable energy source, is also exempt, aligning the tax policy with broader renewable energy goals.
• Efficient Industrial Users: Industrial users that meet advanced water-efficiency standards may be eligible for a 20% reduction in their water resource tax. Provincial authorities will manage and publish lists of taxpayers qualifying for these reductions.

These exemptions reflect the policy’s balanced approach, where critical needs and conservation efforts receive favorable treatment, while high-demand or less efficient water use is subject to taxation.

Enhanced Monitoring and Compliance Requirements

A comprehensive compliance mechanism has been established to ensure accuracy and accountability in tax calculations. Under the reform, taxpayers are required to install certified water metering facilities that adhere to national measurement standards. The government will regularly inspect these devices to ensure their functionality and data accuracy. In cases where taxpayers do not install or maintain these metering facilities, or if they manipulate data, tax authorities will estimate taxes based on maximum intake capacity, with possible adjustments by provincial authorities as needed.

The reform also emphasizes interdepartmental collaboration, with water resource authorities regularly providing tax authorities with critical data on water usage, permits, and measurement standards. This data-sharing mechanism aims to ensure consistent tax enforcement, reduce tax evasion, and align water usage with sustainable management goals.

Local Revenue Allocation and Use of Tax Proceeds

All revenue generated from the water resources tax will be retained locally, boosting funding for regional water management and conservation projects. Provincial and municipal governments will direct these funds toward water resource development, conservation, and protection programs. This localized allocation of tax revenue not only empowers local governments but also fosters accountability, as they are responsible for both the collection and application of the tax proceeds.

During the pilot phase, water utility prices for urban public water supply companies will exclude the water resource tax to prevent a rise in end-user costs. Instead, these companies will list the tax separately to maintain transparency. This approach ensures that the reform does not increase the financial burden on households and allows for gradual adjustments in water pricing structures.

Future Implications and Outlook

China’s water resources tax reform represents a critical move towards sustainable development, addressing both current and future challenges in water conservation and resource management. By instituting a tax structure that prioritizes high-value, responsible water usage and limits strain on vital resources, the reform is poised to generate positive environmental and economic impacts.

The outcomes of this pilot phase will likely influence national resource tax policies, potentially setting a benchmark for future water management strategies. As the pilot progresses, it may offer valuable insights that could be applied to broader resource management efforts across sectors.

Through this carefully structured and targeted approach, China’s water resources tax reform emphasizes sustainable development and efficient water use. The initiative underscores the country’s commitment to preserving essential resources while fostering a responsible and accountable approach to taxation. As local governments and industries adapt to the new framework, the reform will provide a blueprint for balancing resource conservation with economic growth in China.