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May 4, 2017

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China eyes bold tax cuts to spur economy

AS the biggest tax cut in US history has a domino effect on the rest of the world, China may be about to become more aggressive in cutting its taxes to stay competitive.

China has been trying for years to reduce business costs. Monday was the one year anniversary of value-added tax reform, which replaced all business taxes with VAT, the most significant tax overhaul for two decades.

Tangible goods have been subject to VAT for some time, but the levy on services was imposed on the value of a firm’s sales. Such a crude system resulted in a tax on tax. VAT avoids this, as it is applied to the value added at each link in the production chain.

Since last year, taxes on construction, property, finance and consumer service sectors are on value added, such as the difference between wholesale and final sales price for a retailer.

According to the State Administration of Taxation, VAT reform cut roughly 680 billion yuan (US$98.6 billion) of tax for business, with some 98 percent of them feeling the difference.

The reform is an attempt to reduce the burden on service industries, which have historically paid a disproportionate share.

In 2016, the number of newly established businesses in the service sector increased by 25 percent, hiring 43.5 percent of the labor force, compared with 36 percent in 2012.

Automaker Geely has benefited from the reform. Li Shufu, chairman of Zhejiang Geely Holding Group, said the new tax scheme eased corporate payment by nearly 493 million yuan in 2016. That gives the company more leverage to increase spending on research.

To fulfill its promise of around 350 billion yuan tax cuts in 2017, the government announced new measures in April. From July 1, VAT will be simplified, small businesses will enjoy more income tax incentives, and pre-tax deductions for innovation-based technology companies will rise.

“We must cut non-tax charges along with cutting taxes to reduce the burden on enterprises and raise their competitiveness. The government is responsible for creating a sound environment to achieve these goals,” Premier Li Keqiang said at a State Council meeting last month.

In late April, the US government unveiled the biggest tax cut plan in US history. It plans to reduce the number of income tax brackets and lower the tax on corporations from 35 percent to 15 percent.

While any change to US taxes still needs to be approved by Congress, it could see a wave of companies move back to the US from overseas.

Liu Xuezhi, an analyst with Bank of Communications, said the US tax overhaul is expected to reshuffle the global business environment. China needs more tax cuts to stay competitive.

Compared with the United States, China’s tax policy is not aggressive enough, he added.


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