China said Friday it has raised the threshold at which people must pay income tax, as Beijing moves to ease the burden on low-income earners struggling with soaring food and housing costs.

The change follows growing official concerned about inflation and the widening wealth gap in China, which have become major sources of resentment and have fuelled social unrest.

The minimum tax level will now be 3,500 yuan a month ($543) up from 2,000 yuan, the National People's Congress said in a statement, after taxpayers slammed the previously proposed threshold of 3,000 yuan as too low.

The measure, which takes effect in September, will slash the number of income taxpayers to 24 million from 84 million, the parliament said, citing Wang Jianfan, vice director of the finance ministry's tax department.

The announcement confirmed reports published by the official Xinhua news agency on Thursday.

That means only 7.7 percent of wage earners will have to pay income tax, compared with the current 28 percent, Xinhua said, citing Wang.

"It reflects the compensation provided by the nation for rising living costs driven by factors such as price rises," Wang was quoted as saying at a news conference.

The overhaul of the personal income tax regime will reduce the number of tax brackets to seven from nine, with the tax rate for the lowest bracket lowered to three percent from five percent, the parliament said.

Two brackets carrying rates of 15 percent and 40 percent will be eliminated, which is expected to increase the tax burden on high-income earners.

The highest tax of 45 percent will be left unchanged but will apply to a larger group of people.

The move is also in line with official efforts to boost domestic consumption as the government tries to reduce its reliance on exports and investment to drive the world's second largest economy.

Beijing has made containing inflation, which hit a near three-year high of 5.5 percent in May, its top priority this year.

Despite signs the Asian powerhouse is slowing, analysts expect inflation accelerated in June and authorities are tipped to raise interest rates for the fifth time since October in the coming weeks.

Chinese Premier Wen Jiabao reportedly said Monday it would be difficult to hold inflation within the government's target of four percent for 2011, but added that fighting rising consumer prices remained a priority.

China last increased the threshold for personal income tax from 1,600 yuan to 2,000 yuan in 2008, when the country's consumer price index hit 5.9 percent for the year.

earlier related report
China's manufacturing activity slows in June
Shanghai (AFP) July 1, 2011 - Growth in China's manufacturing activity almost stalled in June, two separate surveys showed Friday, as Beijing clamps down on bank lending as part of efforts to tame stubbornly high inflation.

The HSBC China Manufacturing PMI, or purchasing managers index, fell to an 11-month low of 50.1 in June from 51.6 in May, the British banking giant said in a statement, confirming preliminary data released last week.

The official purchasing managers index fell to a 28-month low of 50.9 in June from 52.0 in May -- marking the third straight monthly decline -- the China Federation of Logistics and Purchasing said.

A reading above 50 indicates the sector is expanding while a reading below 50 indicates contraction.

"This implies that policy tightening is working, pointing to a peak of inflation in the coming months," HSBC chief economist Qu Hongbin said in a statement.

The figures are likely to fuel concerns that the world's second-largest economy is heading for a hard landing as Beijing -- anxious about inflation's potential to spark social unrest -- steps up efforts to rein in soaring costs.

"The continued easing in June PMI figures, mainly due to inventory adjustments, suggests economic growth is likely to continue to slow," Zhang Liqun, a government analyst, said in the CFLP statement.

But Zhang added that "demand growth is generally stable and so economic growth will not suffer a deep slowdown".

Both surveys showed inflationary pressures -- a major bugbear for policymakers -- eased last month. The official input prices sub-index, which measures the cost of raw materials, fell to 56.7 in June from 60.3 in May.

Sluggish manufacturing activity "will further depress markets, which have been increasingly worried about a hard landing in China in the past two months," said Lu Ting, China economist at Bank of America-Merrill Lynch.

"Some policymakers -- and their advisors -- might also be more concerned about over-tightening and might consider slightly adjusting their policy stances."

Shares in Shanghai closed down 2.71 points, or 0.10 percent, at 2,759.36.

Authorities are increasingly anxious about inflation, which hit a near three-year high of 5.5 percent in May, and have been trying to stem a flood of credit into the economy by restricting lending and hiking interest rates.

Despite signs the economy is slowing, analysts expect inflation accelerated in June and authorities are tipped to raise rates for the fifth time since October in the coming weeks.

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