OREANDA-NEWS. October 28, 2014. China will increase its resource tax for crude oil and gas output from 5% to 6% at the start of December, while implementing a similar system for coal – the country’s dominant source of energy – according to a joint statement from finance and tax authorities.

China revamped the resource tax for oil and gas in November 2011 by basing it on 5% of sales value instead of volume. Similar reforms for coal have been expected for years, and are finally set to come into effect more than three years after the system for oil and gas was implemented.

Liu Yijun, a professor of business administration at China University of Petroleum, told Interfax the moves mark a further step for resource tax reform, and are part of comprehensive financial and tax reforms by the central government.

The Ministry of Finance and the State Administration of Taxation said the tax increase will take effect on 1 December. But oil and gas producers are unlikely to be greatly affected by the additional levy, because the departments also announced that a mineral resource compensation fee – set at 1% of the sales value for crude and gas production – would be scrapped.

Oil and gas producers may even end up marginally benefiting from the tax increase, according to UBS Securities analyst Yan Beina. The hike will amount to less than a 1% increase when tax discounts are taken into account, while the compensation fee was worth a full 1%. Beina forecast a 0.1-0.2% gain for the financial performances of upstream companies in a research note this week.

The resource tax on coal will range from 2-10% and will be decided by provincial governments.

According to Liu, now is a good time to step up resource tax reform because global oil prices are relatively stable and are expected to remain so. The tax increase will help finance environmental protection efforts and swell local government coffers because all the resource tax revenue goes to them – unlike the compensation fee, which was split between central and local authorities, he added.

The increase will also help reduce the reliance of local governments on land sales – one of the causes of high property prices in many Chinese cities.

The rate may rise further in the future, as the current levy of 6% is low compared with other countries, said Liu. It could eventually hit 10%, but policymakers will be conservative so they have room to make adjustments in the future if needed, he added.