June 10, 2015 marked the day that the Chinese government released a new draft law for public comment. China’s increased awareness of the long lasting effects of pollution on the country’s land, water, and people is reflected in the 2015 Environmental Protection Tax Law. The law represents a joint effort between the Ministry of Finance, the State Administration of Taxation, and the Ministry of Environmental Protection “to protect and improve the environment, to encourage energy conservation and emissions reduction by the society, and to promote the construction of ecological civilization.” [1] However, the underlying motives seem to be: 1) to restructure the current enforcement of fines for pollution and 2) to push for a change in the behavior and operation of businesses.

Breakdown of the New Law

Taxable Pollutants

The 2015 legislation specifically listed: 1) atmospheric pollutants, 2) water pollutants, 3) solid wastes, 4) construction site noise, 5) industrial noise, and 6) other pollutants.

The proposed legislation also allows for localities to add more taxable pollutants or impose higher tax for specific conditions to safeguard the environmental concerns in the area. [2]

Estimated Levy of Taxes:

  • 2 yuan per unit on air pollutants [3]
  • 4 yuan per unit on water pollutants
  • 5 to 30 yuan per unit on solid waste
  • 50 yuan to 11,200 yuan per unit on noise pollution

Additionally, the government may levy double the applicable tax fees if certain categories of pollutants are above “agreed” upon amounts.[4] Fortunately for businesses, the government can reduce the levy by half if pollution is below the national standard. [5]

Tax Bases

The People’s Republic of China (“PRC”) has developed particular methods for calculating the tax bases on different categories of pollutants. The proposed legislation is particularly focused on atmospheric and water pollutants; those categories have “Pollutant Equivalency Values.” These values (in kilograms) and converted into units that are then multiplied by the applicable tax rate, in order to determine the tax payable to the appropriate tax authority. [6][7] The proposed legislation outlines that solid waste pollutant taxation is determined by the amount of solid waste discharged. Building construction noise pollution is determined by the construction area contracted by the construction units. Industrial noise pollution is determined by number of decibels exceeding the limits imposed by the State.

Taxes are levied on the top three atmospheric pollutants from a particular outlet. The proposed legislation also breaks down water pollutants into two classes; Class I outlines the more potent pollutants and heavy metals, such as mercury, cadmium, and chromium, while Class II outlines other water pollutants. The top five heavy metal water pollutants are taxed, in addition to the top three other pollutants. Class I pollutants are taxed at higher rates for smaller amounts because of the potent nature. [8] The tax rate break for water pollution signals the government’s response to public indignation surrounding river and groundwater pollution in the recent years.[9]

Timeline for Levy of Tax:

Environmental protection taxes are levied on a monthly, quarterly, or annual basis, determined by the competent tax authorities on the basis of actual circumstances. Where the taxes cannot be periodically calculated and paid, single incident declaration and payment may be authorized. [10]


Exemptions from the penalties include: 1) taxable pollutants discharged into urban sewage treatment plants or urban domestic waste treatment plants established according to law; 2) industrial solid wastes stored or disposed of in facilities or sites that comply with environmental protection standards 3) pollutants from agriculture, except those from large-scale animal husbandry, and 4) mobile pollution sources including motor vehicles, locomotives, non-road mobile machinery, ships and aircraft, as long as the pollutants are within national standards. [11]

Effect of the New Tax

The proposed legislation specifically calls out enterprises, public institutions, and producers or operators that discharge taxable pollutants within the PRC.[12] While this proposed law is a step in the right direction for an environmentally-friendly China, the implications of such legislation raised some concerns from corporate entities operating in China. Specifically, whether the law will create new violations and penalties, or increase the fine amount for pre-existing violations.

According to several news articles, the tax rate seems to be similar to the current “pollutant discharge fee”[13] but unlike the fee system, this new tax will be compulsory. The legislation states that the tax is levied when polluters or “taxpayers” go above a stipulated amount, but the legislation does not give the actual stipulated amount; the legislation merely states the rate at which certain pollutants will be taxed. This new tax seems to hit the heavily polluting industries such as steel, concrete, non-ferrous metals, coal and chemicals, with increased costs estimated at between 2% and 5%.[14] Although the legislation claims to enforce stricter standards and harsher penalties, it does not outline criminal sanctions for transgressors nor does it outline punishments for taxpayers that evade the tax. In the event of tax evasion or fraud, the legislation instead calls for the tax authorities to report such violations to the Ministry of Environmental Protection. [15]

Underlying Motives:

The policy initiatives and underlying concerns of the government seem to be two-fold – restructuring the system and incentivizing compliance. Prior to this tax, emission fees were not compulsory and largely uncollected. [16] Once adopted, this new system will eliminate the prior, ineffective system that was based on laws passed in 1989. [17] By changing the penalty from the “emission charge” system to the “environmental tax” system, the government will restructure the fee and fee collection process to minimize corruption in the system. In the past, localities waived emission fees for polluters so that the local economy and the businesses would grow; unfortunately, this was at the expense of arable land and the health of the citizens. Under the restructured “tax” system, the government will maintain more control by creating a centralized approach for implementation. [18] The proposed legislation seems to imply that a national entity, such as the Ministry of Environmental Protection and/or the Ministry of Finance, will assess and collect the taxes instead of allowing the localities to collect the tax in order to stop corrupt officials from approving polluting factories.  Additionally, the tax system should make compliance with the national standards more appealing; previously, the cost of compliance outweighed the fines. [19] By levying a continuous tax based on the types and amount of pollution, the polluting businesses will actually pay for the damages they cause to municipalities; this is a harsher stance than a one-time emission fee used in past years.

Overall, the legislation seems to have the interests of the public in mind; the biggest factor that will determine whether this law is different from the ineffective “emission charge” system is the enforcement aspect. Enforcement challenges may arise due to the inter-agency nature of this legislation; especially since certain penalties have yet to be defined by the law. Furthermore, the threat of being “reported” to a government agency for tax evasion or fraud may not be enough to coerce businesses into adhering to this new system or push businesses to change their polluting practices.

*Briana Jones is a law clerk in Sheppard Mullin’s Beijing office.


[1] See Article 1 “Environmental Protection Tax Law (Draft)”

[2] See Article 3 “Environmental Protection Tax Law (Draft)”

[3] See Appendix 1: Environmental Tax Items and Rates Table “Environmental Protection Tax Law (Draft)”

[4] See Article 23 “Environmental Protection Tax Law (Draft)”

[5] See Article 12 “Environmental Protection Tax Law (Draft)”

[6] In-Depth explanation and table for the tax bases can be found at “ New Measure to Reduce Pollution – The Draft Environmental Protection Tax Law released”

[7] See Article 4 “Environmental Protection Tax Law (Draft)”

[8] See Appendix Table 2: Taxable Pollutants and Equivalent Values Table “Environmental Protection Tax Law (Draft)”

[9] “China says More Than Half of its Groundwater is Polluted”

[10] See Article 18 “Environmental Protection Tax Law (Draft)”

[11] See Article 11 “Environmental Protection Tax Law (Draft)”

[12] See Article 2 “Environmental Protection Tax Law (Draft)”

[13] “China Proposes Double Taxes on Excess Emissions”

[14] “China Issues Draft on Environmental Taxes to Combat Pollution”

[15] “China Proposes Double Taxes on Excess Emissions”

[16] “China Issues Draft on Environmental Taxes to Combat Pollution”

[17] See Article 28 “Environmental Protection Tax Law (Draft)”

[18] “China Issues Draft on Environmental Taxes to Combat Pollution”

[19] “China Plans to Implement Strict Pollution Laws”