China’s 190 million residential tenants, and probably a comparable number of owners of properties, are slowly coming to terms with a new individual income tax policy that has implications for not just the real estate industry but the larger economy.

The government’s Dec 22 announcement of interim special individual income tax deductions took effect on Jan 1, with the goal of lowering the tax burden of people with certain expenditures.

Taxpayers are now eligible for housing rent deduction of up to 18,000 yuan ($2,660) from their taxable annual income, if they do not own any housing in the city where they work.

Industry data show only 1 percent of property owners pay tax on rental income. That’s because the residential market sees a lot of direct informal deals between landlords and tenants.

Property agents are avoided to escape documentation that could lead to taxes, said Yang Weihua, finance and tax professor from Sun Yat-sen University, in an interview to China National Radio. “It’s not common for property owners to declare tax voluntarily,” Yang said.

Market insiders said some landlords may persuade their tenants not to claim rent-related deduction.

Any such claim by a tenant may require documentation. This, however, would likely lead to a heavier tax burden on the landlord concerned for income through rent.

So, to compensate for higher tax outgo, the landlord may pass on his burden to the tenant. In effect, while saving on tax, the tenant may end up paying a higher rent, negating the purpose of the new policy. Or so goes the theory.

But the rental market may remain unaffected as market forces like demand and supply typically determine rent levels, said Mi Yang, head of research of the North China market at consultancy firm JLL.

Any impact from the interim new tax policy would be neutralized over time as the general public get used to disclosing incomes accurately.

Wang Wei, a software programmer in Beijing, said she does not intend to apply for rent-related deduction as her rental agent said she may end up paying for the landlord’s additional tax indirectly, by way of higher rent.

A public relations practitioner in Beijing, who sought anonymity, said she lives in a rented house in an urban area while renting out her own house in a rural area.

“It’s good to hear my tenant does not plan to apply for rent-related deduction. Otherwise, I may have to pay more tax. And if my tax outgo rises, I may increase rent for my house a bit.”

For tenants in first-tier cities such as Beijing and Shanghai, the new tax policy could potentially save them 1,800 yuan annually, which could help boost consumption eventually.

According to the Beijing municipal tax bureau, the comprehensive tax rate for rental is 5 percent, including individual income tax and house property tax. This means, a house owner should pay 300 yuan monthly for renting out a house at 6,000 yuan per month.

According to a recent report in the Beijing News, Ziroom, a major online apartment rental platform, announced the company will pay the tax, if needed.

Other real estate rental operators, such as Danke, and long-term rental apartment brands such as Vanke’s Port Apartment and Longfor’s Guanyu, also said they are willing to provide their information to help tenants get tax deduction.

“A clearer interpretation from the tax authorities can be expected soon,” said Mi of JLL.

According to a report in the Securities Daily, an official from the State Taxation Administration said the issue is still under discussion as other ministries such as finance and housing are also involved.

Sandy Cheung, a partner at PwC specializing in individual income tax, said the rationale for requesting in-depth information on rental expenses is to provide tax authorities a means to verify the genuineness of a deduction made by taxpayers and to deter them from making false claims on non-existing expenses.

“It is never the intention of tax authorities to use the information collected via the rental expense special deduction item as a means to track down tax revenue due to tax non-compliance of some property owners.

“We, however, would like to highlight that rental income has all along been an income type that is subject to tax. This current practice would sooner or later be rectified with more robust national data collection system and nationwide sharing of information between government authorities and third parties such as banks or real estate agents,” Cheung said.

According to data from Orient Securities, the number of tenants is expected to reach 270 million by 2030, bolstering the scale of the rental market to 4.2 trillion yuan.