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October 25, 2018

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China eyes broad-based tax cuts as it seeks to shore up economy

China has announced a new round of tax cuts in a bid to shore up its economy amid external uncertainties, unveiling draft temporary measures on special additional deductions from taxable personal incomes.

The move, announced Saturday, is part of a broader overhaul of the individual income tax law. The new deductible items include children’s education, continuing education, treatment for serious diseases, caring for the elderly, housing loan interest and rents.

These six deduction items could reduce annual tax burdens by 116 billion yuan (US16.73 billion), which could translate into an 81 billion yuan of consumption increase and may raise consumption growth and nominal GDP growth by 0.22 and 0.08 percentage points, respectively, Asian investment bank Nomura said in a research note.

“We expect more substantial tax reforms in the coming months,” it said.

China has pledged a more proactive fiscal policy to boost the economy, which expanded at a pace of 6.7 percent in the first three quarters, above the government target.

Finance Minister Liu Kun said recently the proactive fiscal policy will prioritize four ares: cutting taxes and fees, improving weak links, boosting consumption and improving people’s livelihood.

Apart from policies to reduce taxes and fees unveiled at the beginning of the year, China has announced more policies to support the real economy and technological innovation, which will help reduce enterprises’ burden by more than 1.3 trillion yuan this year, Liu said.

While the revision on the individual income tax law is expected to reduce household burdens, China’s new value-added tax reform measures helped trim the tax bills at the corporate level.

Starting from May 1, the VAT rate was lowered from 17 percent to 16 percent for manufacturing and some other industries, and from 11 percent to 10 percent for transportation, construction, basic telecommunication services, and farm produce.

In addition to the rates cut, the reform also offered tax incentives for some high-tech companies and unified the standard for small-scale taxpayers.

These measures have reduced corporate taxes by 238.6 billion yuan as of end-September, according to Zheng Xiaoying, a senior official with the State Administration of Taxation.

Due to the reform, China’s tax revenue slowed growth to 8 percent in the third quarter, lower than 13.1 percent in the second quarter and 17.8 percent in the first quarter.

More tax reduction measures may be on the way. Ma Jun, a member of the monetary policy committee of the central bank, said that China could cut the tax by about 1 percent of GDP next year, Shanghai Securities News said.


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