Lightening the Burden

China’s structural tax reduction is set to help boost domestic demand, shore up corporate profitability and stimulate imports By Lan Xinzhen

Lightening the Burden

China’s structural tax reduction is set to help boost domestic demand, shore up corporate profitability and stimulate imports By Lan Xinzhen

SPURRING IMPORTS: Workers at the Shanghai Yangshan Deep-water Port. China plans to cut its import tariffs in 2012 as part of efforts to boost imports

As part of its efforts to strengthen structural tax reduction, China continues to lower its import tariffs. As of January 1, 2012, average import tariffs for more than 730 product categories were set at 4.4 percent, barely half of the Most-Favored-Nation tariff treatment.

“China will continue to implement and improve the policy of structural tax reduction,” said Xie Xuren, Minister of Finance, at the National Finance Conference on December 25, 2011.

Concrete measures

As an important part of China’s structural tax reduction campaign, lowering import tariffs could help increase imports of much-needed energy and resource products, advanced equipment and core components and parts.

Moreover, small and micro-sized enterprises will also benefit from the policy. Xie said the government will implement a string of measures, including raising the exemption threshold of value-added tax and business tax for small and micro-sized enterprises. The Ministry of Finance recently also announced it will halve the corporate income tax for small and micro-sized enterprises with annual revenue of less than 60,000 yuan ($9,479). According to the policy, effective between 2012 and 2015, the tax base of those firms will be cut by 50 percent while the tax rate remains 20 percent.

The country has been pressing ahead with reforms to its tax system. On January 1, 2012, China will launched a pilot program to replace the business tax with a valueadded tax in the transport industry and some service sectors in Shanghai. The reform is a needed boon to eliminate repeated taxation on goods and services and alleviate financial burdens on companies.

In another move, the country will in 2012 make supportive business tax policies available for more logistics firms and support their storage construction with favorable tax policies on using urban land. Vegetable wholesale and retail businesses will be exempted from value-added tax.

“In the coming year, the country plans to deepen the resource tax reform and widen its coverage in a move to better support resource conservation and protect the environment,” said Xie. “In addition, we will push forward the trial program of property tax and further improve the consumption tax system.”

“Efforts will be made to adjust the coverage and rate of consumption tax so as to promote energy conservation and emission reduction and encourage rational consumption,” he added.

The overall scale of China’s structural tax reduction remains unclear. But in a recent report, the China International Capital Corp. Ltd. estimated that the pilot program of value-added tax reform in Shanghai could decrease the tax burden of affected industries by around 70 billion yuan ($11.1 billion).

While enterprises and residents are bound to benefit from tax reduction, concerns are growing about the impact on China’s fiscal revenues. But Liu Shangxi, Deputy Director of the Research Institute for Fiscal Science under the Ministry of Finance, downplayed the worries.

“There is no need to worry about a possible slump in China’s fiscal revenues since the tax reduction is only structural and limited in scale,” he said.

“Moreover, the reform of resource tax, property tax and environmental protection tax are likely to increase tax revenues,”added Liu.

In the late 1990s, China included structural tax reduction in its proactive fiscal policies. The measure played a vital role in the country’s efforts to counter the ripple effect of the financial crisis in 2008. Ever since then, China has been continuously pressing ahead with structural tax reductions. Gao Peiyong, Director of the Institute of Finance and Trade Economics, Chinese Academy of Social Sciences, said there are three major reasons behind the move.

First, weakening external demand has been a drag on economic growth, but the crisis is less acute than in late 2008 and early 2009. As a result, China needs to fine-tune its macroeconomic control, but aggressive fiscal expansions have been unnecessary.

Second, after massive government-led investments two years ago, economic rebalancing has become an urgent task for the country. While it hands out fiscal incentives for the economy, China must walk a fine line between maintaining growth and transforming the growth model. Structural tax reduction becomes a good option as it could stimulate the economy without complicating the rebalancing efforts.

Third, China’s fiscal revenue was set to exceed 1 trillion yuan ($158 billion) in 2011, making the country more able to afford massive tax reductions.

Suggestions

Gao Peiyong said the tax reduction should achieve two goals—relieving tax burdens for enterprises and residents and optimizing the structure of China’s tax system.

Currently China has three turnover taxes: value-added, consumption and business taxes. In 2010, the country’s value-added tax revenue accounted for 39.5 percent of the total, followed by 14.4 percent from business tax and 9.9 percent from consumption tax.

The business tax is a tax on the gross revenue of a business, while the valueadded tax refers to a tax levied on goods and services sold in a country or region.

Gao added the trend of replacing the business tax with value-added tax is inevitable, and the country should attach great importance to the reform since it brings tangible benefits to firms and individuals.

He expected the value-added tax revenue to account for more than 50 percent of China’s total tax revenue in the future.

Major Structural Tax Reduction Measures In 2011

● The amended individual income tax law, effective September 1, 2011, raised the monthly tax exemption threshold from 2,000 yuan ($313) to 3,500 yuan ($547).

● On October 12, 2011, the State Council announced a series of policies to support small and micro-sized enterprises, including raising the exemption threshold of their value-added tax and business tax, and halving the corporate income tax for small and micro-sized enterprises with annual revenue of less than 60,000 yuan ($9,479), effective between 2012 and 2015. In addition, financial institutions lending to small and micro-sized enterprises shall be exempted from stamp duty on the loan contract in next three years.

Lin Shuanglin, Dean of the Department of Public Finance, School of Economics, Peking University, said China should make tax reduction play a bigger role in driving economic growth.

“To fend off impacts of the financial crisis, China adopted expansionary fiscal policies in the past few years, which led to a surge in the outstanding national debt and local government debts,” said Liu.

“Obviously, increasing government expenditure is no longer appropriate for China, and the country’s tax reduction measures remain far from heavy enough,” he added.

Lin pointed out that China’s tax rate has been at a high level. The corporate income tax rate now stands at 25 percent, a relatively high level compared with other countries like Singapore, Russia and the United Kingdom.

“Many Chinese firms, especially private ones, are struggling with operation difficulties amid the global recession,” he said.“Heavier tax reductions would inject fresh momentum into the economy and deliver a boost to employment.”

“Instead of simply lowering the tax rate, China needs to introduce new measures, such as adding new tax deduction items and adjusting the calculation method of the tax base,” said Lu Zhengwu, chief economist with the Industrial Bank Ltd.