# 2.1. The central-local revenue-sharing relations

Before 1980, the fiscal system was characterized by centrlized revenue collection and centralized fiscal tansfers, i.e., all taxes and profits were remitted to the central government and then transferred back to the provinces according to expenditure needs approved by the center. Since the early 1980s, the central-provincial fiscal relation has gone through three major phases.3 In 1980, the highly centralized system was changed into a revenue-sharing system in which the central and provincial governments each began to "eat in separate kitchen." This system was named as the contract responsibility system, which emulated a similar system adopted in the rual reform in the late 1970s.4 There were thee basic types of revenue under the reformed system: central-fixed revenues (those revenues and taxes accrue to the center), local-fixed revenues (those accrue to the localities), and shared revenues (those shared between the center and localities according to some agreed rules).' During the period of 1980-1984, about 80 percent of the shared revenues were remitted to the centmal government and 20 percent retained by the local govemment. Almost all the revenues, except a few minor ones in the central tixed revenues, we collected by the local finance bureaus. The bases and rates of all 3 The following literature has described in detail the evolution of China's central piovincial fiscal relations since 1980: The World Bank (1992), Oksenberg and Tong (1991), Agarwala (1992) and Wong (1991).

4 le central-local fiscal system adopted in 1988 was named The Big (comprehensive) Fiscal Contract System. In the rest of this paper, we broadly refer to all variants of the decentralized fiscal system adopted since 1980 as the "fiscal contract system." ' The revenue-sharing system based on the three types of revenue continued since 1980, although the items in each revenue type have changed over time. Since 1985, the three types of revenue have basically maintained the following structure: Central-fixed revenues mainly include: income tax, adjustment ItAx and profit remittance of centrally-owned enterprises, business tax from railroads, banks and insurance company headquates, fuel oil special taxes, income taxes, sales taxes and royalties from offshore oil activities of foreign companies and joint ventures, treasure bond income, 70 percent of the three sales taxes collected from enterprises owned by the Ministry of Industrial the Ministry of Power, SINOPEC, and the China Nonferrous Metal Company, all customs duty and all VAT and product taxes collected at customs, tobacco tax and business on tobacco, product tax on liquor and tobacco.

Local-fixed revenues include: income tax and adjustment tax of locally-owned enterprises, income tax frm collectively-owned taxes, agricultural and animal husbandry tax, urban maintnance and construction tax, property tax, title trade tax, individual industrial and business tax, market tax, bonus tax, vehicle utilization tax, special tax on forestry and agriculuWal products, slaughter tax, personal income tax and salt tax, 30 percent of the three sales taxes collected from enterprises owned by the Ministry of Industrial the Mimistry of Power, SINOPEC, and the China Nonferrous Metal Company.

The shared revenues include: all turnover taxes (including VAT, business tax and product tax) revenues from all enterprises (with some exceptions), natural resource taxes, construction tax, salt tax, industrial and commercial tax, and income tax, levied on foreign and joint venture enterprises, energy and transportation fund tax. Source: Agarwala (1992) and MOF.

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