The introduction of a nationwide residential property tax in China would help local governments with more stable, sustainable and diverse revenue, said Fitch in its latest report.
China included the discussion of a nationwide residential property tax into its five-year legislative plan earlier this month, following pilot projects in Shanghai and Chongqing in 2010.
"At the core, it would provide more sustainable finances and diversify tax sources. Residential property taxes would reduce local governments' reliance on land sales which have hitherto been a key source of revenue," said the report.
This would in turn reduce revenue volatility, said Fitch, adding that by relying so heavily on land sales, local government finances have depended on developer demand which can be unstable - particularly during property sector downturns.
Furthermore, securing more sustainable sources of tax revenue is key for local governments with economic growth rates falling to a range between 6 percent to 7 percent, according to the report.
Fitch expects residential real estate taxes to eventually be enacted nationwide, though it may take time as administrative processes and policies are finalized.
The report notes that the lack of a nationwide residential registration database in China could present challenges in enforcing property taxes.