Extension of VAT to ensure reductions
Print Edition
CHINA can manage its rising debt as it steps up deficit spending to prevent a slide in growth, the finance minister said yesterday.
A deficit target of 3 percent of gross domestic product announced on Saturday, up from last year’s 2.3 percent, is in line with long-term reforms, Lou Jiwei said as he sought to quell fears about the economy.
Growth is declining as the government tries to steer the nation toward expansion based on consumer spending instead of trade and investment. But an unexpectedly sharp deceleration over the past two years has sparked fears of job losses and prompted Beijing to launch mini-stimulus measures.
“We are increasing the debt-to-GDP ratio to support achieving a medium to high-speed rate of economic growth,” Lou told a news conference during the annual meeting of China’s legislature. “Why do we do that? Because we don’t want to see a decrease in economic growth and because we want to give strong support to structural reform.”
At the opening of the National People’s Congress on Saturday, China announced a lowering of this year’s economic growth target to 6.5 to 7 percent from last year’s “about 7 percent.”
Growth fell last year to 6.9 percent, though that was still among the world’s highest.
On Sunday, the chairman of China’s planning agency, Xu Shaoshi, said there was no danger of a “hard landing,” or dangerously sharp drop in growth.
Lou yesterday acknowledged a rise in China’s overall debt, partly due to stimulus spending in response to the 2008 global crisis, but he said the government could still afford to finance its deficit.
Government debt is “not very high” at 11 trillion yuan (US$1.7 trillion) or the equivalent of 40 percent of GDP, Lou said. That compared with over 240 percent of GDP for Japan, which is struggling to restore balance as its population ages, driving costs for health and elderly care higher.
“The central government has room to continue to issue bonds,” Lou said, but added that Beijing needs to do more to control local government debt. A rapid run-up in such debt has raised concerns about possible defaults and the impact on the banking system.
Last week, Moody’s Investors Service cut its outlook for China’s government credit rating from stable to negative, citing rising debt, capital outflows and “uncertainty about the authorities’ capacity to implement reforms,” but deputy finance minister Zhu Guangyao responded by saying that this view was “wrong and shortsighted.”
Lou told the news conference that business tax in all industries will be replaced by value-added tax before May this year, a concrete step in deepening fiscal and taxation reform, though he admitted his ministry should have been faster in reforming VAT.
“The progress in VAT reform last year was slower than planned, efforts will be made to meet the May 1 deadline,” he said.
From May 1, the replacement of business tax with VAT will be extended to construction, real estate, finance and consumer services, to ensure the tax burden on all industries is reduced, Premier Li Keqiang said in a government work report to the legislature.
The great number of corporate taxpayers, about 9.6 million, in these industries caused slow progress last year, Lou said.
Business tax is a levy on the gross revenue of a business while VAT is levied on the difference between a commodity’s price before taxes and its cost of production.
A pilot scheme on business tax-to-VAT began in 2012.
From then to the first half of 2015, the measure resulted in tax savings of more than 484.8 billion yuan, accounting for 0.2 percent of GDP in the period, according to a report by China International Capital Corp Ltd, a joint venture investment bank.
Lou encouraged businesses to make good use of the money saved from VAT reform, especially by channeling it into higher efficient investment and promoting industrial upgrades.
Lou also said his ministry is working with relevant agencies on property taxation and proposals on income tax reform.
However, Lou said reform would be “a complicated process,” and advised against too high expectations.
The government has completed a reform plan on income tax, Lou said. An amendment to the current individual income tax law will be submitted to the national legislature this year.
The amendment is not just about thresholds, he said, but considers overall income and spending, such as on mortgages, education and elderly care.
Implementation of the law is complicated and will be promoted step by step, he said.
The personal income and property information system should also be improved and relevant laws need to be amended for income tax reform, he added.
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