China’s top legislature adopted an amendment to the Individual Income Tax Law on Aug 31, raising the minimum threshold for paying personal income tax from 3,500 yuan ($510) to 5,000 yuan per month, or 60,000 yuan per year.

The amendment aims to reduce the burden for taxpayers, raise people’s incomes and boost consumption, legislators and finance officials said.

“Considering that the average basic consumption expenditure for residents in Chinese cities and towns is about 4,200 yuan a month per person in 2018, we set the minimum threshold of personal income tax at 5,000 yuan. It not only covers the expenditures but also leaves room for further increases in consumption,” Vice-Finance Minister Cheng Lihua said at a news conference on Aug 31.

The amendment also adds special expense deductions for items such as children’s education, continuing education, treatment for serious diseases, as well as housing loan interest and rent. This is the first time that such deductions have been introduced to China’s individual income tax system.

The change to the income tax threshold will take effect on Oct 1, while the rest of the amendment will go into effect on Jan 1.

The State Council will make detailed rules on the scope, standards and procedure for special expense deductions. The procedure will be simplified for easy implementation, Cheng said.

“Raising the minimum threshold for personal income tax and introducing special expense deductions into the individual income tax system will significantly reduce taxes for the public and increase their incomes,” she said. “It will encourage people to expand their demand for consumption and therefore drive economic growth.”

These changes to the Individual Income Tax Law will cut fiscal revenue in China by about 320 billion yuan a year.

Official data show that the individual income tax was the third major contributor to total tax revenue, following value-added taxes and corporate income taxes. Last year, China collected individual income taxes worth nearly 1.2 trillion yuan, about 8.3 percent of total tax revenue.

Liu Lijian, chief auditor of the State Administration of Taxation, said the administration is striving to prepare for the new changes by updating its information system, adjusting individual income tax software, and training front-line service personnel.

For special expense deductions, the administration will hurry to make supporting implementation measures and try its best to reduce the documents required for submission to the taxation authorities, Liu said.

First introduced in 1980, the current threshold is 3,500 yuan, according to the revision made in 2011.