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China’s new social security tax to hurt Indian businesses

November 3, 2011

Indian and foreign firms in China are adopting a wait and watch guard over China’s social security law which was put into effect from October 15th, 2011. Firms such as Infosys which have an in-house policy of securing ten percent of each overseas office with Indians will feel the pinch as each foreign employee with a work visa is mandated to pay social security tax as per Central Government regulations. The said tax is expected to push up the wage bill by over 40 percent.

China has extended the social security system to cover all foreign companies and their employees. Under the law, employers are expected to contribute 37 percent of salary and employees 11 percent into the social security pool. The maximum amount to be paid per month varies between 9,000 yuan and 11,600 yuan (US$1,415 to US$1,837) in various cities.  According to the regulation in Beijing, the salary cap for paying social security contributions is 12,603 yuan (US$1,978) in 2011. For each employee earning that or higher, employers have to pay about 4,096 yuan, and the employees need to pay about 1,326 yuan, per month. The majority of foreign workers earn at least the cap and, therefore, companies hiring them will face greater costs. Roughly, the total added cost for one foreign worker would be about 65,000 yuan per year: about 49,000 yuan to be paid by the employer and about 16,000 yuan to be paid by the employee.

The tax which hasn’t yet been implemented across the country, is expected to increase costs for foreign firms exponentially, encouraging them to trim the fat on hiring foreign employees Vs domestic workers. The tax law which needs to be implemented across the board by the end of this year, is also expected to hit overseas Chinese, who until now have enjoyed the benefits of being Chinese and Foreign at the same time. It is their response to the new tax regime which has thwarted local governments from imposing the tax immediately.

The social security or social insurance tax, will cover roughly 230,000 foreigners and needs to be paid across five categories – pension, medical, unemployment, working injury and maternity insurance. China which is expected to grow old before it grows rich, is keen to improve social security measures such as healthcare, education, and the rural upliftment, even as inflation has caused sever personal finance crisis. Extending the social security, which firms paid towards Chinese employees to foreigners now is expected to aid Beijing in fulfilling this deficit, however many foreign firms wonder if they will ever get their money back. For instance, a foreigner who loses a job in China instantly loses the right to live here, and it is unclear how he or she is going to benefit from the unemployment insurance and retirement pension. Additionally, the benefits outlined, aren;t attractive enough to foreigners – under the new tax, employees covered can access government-run hospitals, however all Indian’s in China prefer western run hospitals due to the language barrier.

For details on the new law please see – Cough it Up: A Guide to China’s New Foreigner Social Security Tax – Wall Street Journal.

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