Chinese Structural Tax Reduction Policy: Comments and Analysis

Wang Ping,Professor, the Faculty of Law, the College of Applied Arts and Science, Beijing Union University, Beijing, China

Since China implemented the fiscal and taxation system with the system of tax distribution as the core in1994, the tax system reforms have been focused on increasing tax revenue and improving the tax system. However, as time goes by, the government, especially the central government, has accumulated a lot of financial resources, and the tax revenue growth has gradually increased year by year. By 2011, the tax revenue had accounted for 19% of GDP, and its growth rate had reached 1.5 times that of GDP[1]. And the current round of global economic crisis starting from 2008 still has an impact on the economic and social development. Because of the imbalance of contribution to economic development from return on investment, household consumption and export trade and hard growth of many enterprises in the harsh economic environment, the implementation of structural tax reduction should be a feasible choice to solve the problem.

I. Meaning of structural tax reduction

Structural tax reduction in our country is still a new thing, which was proposed at the Central Economic Work Conference in December 2008, and until now, the government has promulgated the appropriate structural tax reduction policies and measures every year, based on the international and domestic economic environment and economic priorities that year.

The so-called structural tax reduction means the macroeconomic regulation and control measure of the government in the active implementation of the fiscal policies by adjusting and optimizing taxes and its elements to alleviate tax burden of residents and enterprises, to stimulate the vitality of the market and enhance the development of power sector, and to promote sound and fast development of national economy[2]. The structural tax reduction lays emphasis on selective tax reduction, which is aimed to reduce the tax burden of a specific target group and a specific tax in order to achieve a specific goal so as to distinguish from the comprehensive, large-scale tax reduction and increased and decreased tax burden adjustment.

Structural tax reduction is the selective and limited tax reduction, namely, the tax reduction aims at a specific tax and is implemented in a specific area or region, thus reducing the overall tax burden and reaching the goal of optimizing the tax structure and serving the economic growth and the transformation of economic growth mode.

II. Comment on structural tax reduction policy[3]

Essentially, China started reducing the taxes in 2001 in the “10 five-year” plans and withdrew the reform pilot of agricultural tax and VAT in 2006 (consumption-based VAT comprehensively implemented in 2009), during which China began to implement the structural tax reduction. However, the tax reduction policy defined clearly as the structural tax reduction policy started after the Central Economic Work Conference in 2008, and, therefore, this paper mainly analyzes the structural tax reduction policy after 2008.

(I) Overview of structural tax reduction policy

The comprehensive analysis of China’s structural tax reduction policy in recent years mainly relates to the VAT, business tax, corporate income tax, personal income tax, customs and other duties and taxes, and based on the purpose of the implementation of structural tax reduction measures, they can be summarized as follows:

1. Measures to optimize the industrial structure and enhance the competitiveness of enterprises.-to support the real economy, to comprehensively implement the consumption-based VAT since 2009 and to promote business investment and technological progress; to strengthen the tax support of financial sector, cultural and creative industry and modern service industry, to give concessions to rural credit cooperatives and rural commercial banks in terms of business tax, etc., in 2009, to implement unilateral imposition of stamp duty on securities transactions in September 2008, to exempt the enterprises from corporate income tax on the interest income from government bonds, etc., in 2008; to provide preferential policy to the advanced technology service enterprises in the 21 service outsourcing demonstration cities in terms of corporate income tax, business tax, etc, since 2009; to implement preferential policy on VAT, corporate income tax, etc., for the transformation from operating cultural institutions into enterprises and development of cultural industry, animation industry, etc., since 2009, to set pilots from collection of business tax to collection of VAT for Shanghai transportation industry and part of modern service industries in 2012 to eliminate double taxation and reduce the prices of the related services and commodities.

2. Measures to expand domestic demand and improve the people's livelihood.

-to temporarily exempt the personal income tax on interest income from savings deposits since October 2008, to raise the wage income tax deduction standard, adjust the tax rate table, reduce the wage income tax burden, and increase the resident income and expand domestic demand since September 2011, to create the conditions for change in the mode of economic growth; to reduce the import tariff on more than 700 kinds of commodities, including the residents' daily necessities, and exempt VAT on income from wholesale and retail of 219 varieties of vegetables in 2012; China has continued to extend the implementation period of tax preferential policy to promote employment and re- employment since 2008; to support and solve the housing problems of the masses, China, since 2008, has implemented the preferential tax policies on real estate tax, land value-added tax, deed tax, stamp duty and other taxes for the construction and operation of the low-rent housing, affordable housing, and public rental housing.

3. Measures to promote scientific and technological progress and independent innovation and encourage energy conservation and environmental protection.

- to implement the new Law on Corporate Income Tax since 2008, to implement an additional deduction of R & D costs of the enterprises, and to levy a reduced rate of 15% of the corporate income tax from high-tech enterprises supported by China to encourage technological development and independent innovation; since 2008, to provide preferential tax policies on the related sales tax, property tax and urban land use tax, etc., in order to give support to the construction of science and technology business incubator and university science park; to implement the preferential policies on VAT, etc., to encourage the development of software and IC industries in 2011. Since 2008, China has successively adjusted and improved the tax policies on energy conservation, environmental protection, etc., exempted the customs duties and import VAT on the imported key parts and components and raw materials for the production of large environmental protection and comprehensive utilization equipment by the domestic enterprises, and the investment on the special equipment for environmental protection, energy and water conservation could offset part of the corporate income tax.

4. Measures to support small and micro-sized enterprises and promote coordinated regional development.

In 2009, China promulgated the tax policies to reduce half the corporate income tax of small enterprises with low profits and to allow the special reserve fund of the financial enterprises for SMEs loan loss to be deducted before income tax; in 2010, China promulgated the policy to levy a reduced rate of 3% of the business tax on the financial and insurance income of the qualified rural financial institutions and other policies; in 2011, China implemented the thresholds of VAT and business tax to promote the development of SMEs and individual industrial and commercial households; since 2011, to implement the preferential tax policies on exemption of stamp duty from the loan contracts between the financial institutions and the SMEs and other polices to encourage the financial institutions to issue loans to SMEs; in 2010, to implement the new round of ten-year tax policies to promote western development to levy a reduced rate of 15% of corporate income tax from the similar industrial enterprises located in the western region, and the income from the investment on public infrastructure projects meeting the national support conditions could enjoy the concession of “three exemption, three half corporate income tax”; to continue to implement or promulgate the new preferential tax policies to give support to regional development of the special areas with difficulties, national minority frontier area, etc.; in 2011, to set the pilots of departure tax rebate and offshore duty-free policy in Hainan.

5. Measures to promote export and encourage import.

Since the second half of 2008, in response to the status quo of weakening export, China has implemented the substantial increase in export tax rebates for some products, cancelled and reduced export tariffs for some products, in order to stimulate exports and ensure the export trade will not substantially decline; in 2012, through the implementation of lower temporary tariff rate on import goods, etc., to encourage import of the advanced technical equipment and key parts and components that cannot be produced domestically or cannot meet the requirements in terms of performance as well as domestic scarce energy, resources, raw materials and other products.

(II) Disadvantages of structural tax reduction policy

Some of the above structural tax reduction policies have been implemented for a period of time, whose effects are also embodied in the practice to some extent, some are being implemented, and some are subject to further verification. Of course, it still takes time to accumulate informative data to accurately estimate the specific effects of the various tax reduction policies. Therefore, this paper only provides for the qualitative analysis and comment on the disadvantages of the structural tax reduction policy.

1. Personal income tax break is not enough, and its contribution to the expansion of domestic demand is limited.

The reforms on the personal income tax in recent years are mainly focused on increase in deduction standard of wage income, until September 2011 when the standard of 3,500 Yuan was implemented, and there is no change in other revenues. However, taking into account a combination of factors such as the rising prices and the individual support burden, it just raises the wage deduction standard; although China has reduced many taxes on the whole, in fact, it produces little effect for an individual and cannot stimulate the consumption in an effective manner.

2. Due to the departure of the actual operation from the policy orientation, SMEs get little benefit.

Difficulty of financing is always the bottleneck that plagues the development of SMEs. Although China has provided the preferential tax policies to encourage financial institutions to issue loans to SMEs, they did not play its due role in practice. In terms of the preferential tax policies to allow the special reserve fund of the financial enterprises for the special SMEs loan loss to be deducted before income tax and to exempt stamp duty from the loan contracts between the financial institutions and SMEs since 2011, because the financial institutions are based on their own business arrangements and disadvantages of SMEs in practice, they rarely issue loans to SMEs[4].

Another tax reduction measure for SMEs, i.e., the increase in thresholds of VAT and business tax to 5,000 Yuan - 20,000 Yuan, is intended for the individuals and individual industrial and commercial households. However, in practice, all parts of the country have implemented the standard exceeding 5,000 Yuan, and, therefore, this increase in threshold has generated little practical effect. In the meantime, the grass-roots collection and management authorities in the tax practice is based on the taxation tasks to be completed, and thus it will strengthen the tax management for SMEs and individual industrial and commercial households, even artificially raise the tax.

3. Problems of  pilot change from business tax to value-added tax in Shanghai.

In order to eliminate repeated taxation, reduce burden of enterprises, reduce commodity prices and perfect the tax system, pilot change from business tax to value-added tax has been conducted since January 1, 2012, for Shanghai's transportation industry and some modern service industries. The corresponding tax rate has been set for different industries. However, some problems have occurred over past six months.

(1) Insufficient deduction causes rising of enterprise tax burden.

Business tax rate of enterprises on transportation industry is 3%, and the rate after being changed into value-added tax is 11%. If the deduction is not sufficient, the tax burden difference of both is huge. As most of the enterprises only receive limited deductible bills at early stage of pilot, for there are no fixed assets investments (the fixed assets investment of transportation enterprise is periodic), and other items of expenditure[5], which causes the insufficient deduction, the tax burden of enterprises is not reduced but raised also due to differences of tax rates. The small-scale taxpayers and enterprises of other modern service industries are not greatly affected due to the relative low tax rate.

(2) Impacts on tax collection system and fiscal system.

According to the pilot program, the national tax authority shall replace the local authority for taxation after the business tax is changed to value-added tax[6], but the tax revenues still belong to local finance. Thus, the division of labor between local tax authority and national tax authority has changed, which is a change of national tax collection system to a certain degree. The national fiscal system determined in 1994, which is based on tax distribution system, is a kind of fiscal system with national finance as the main body. Most of the tax revenues are distributed to national finance. However, most of the present local finance is from business tax, which also includes non-financial enterprise income tax, personal income tax, property tax, resource tax and 25% value-added tax etc. Once the policy that changes the business tax belonging to local finance to value-added tax is formally implemented after the pilot, how to further balance financial strength of local governments and central government shall become a major issue relevant to national fiscal system.

III. Outlook and improvement suggestions on structural tax reduction policy

Many reforms on tax system in recent years are the structural tax reduction. But the tax reduction effects are not obvious. It is mainly due to the fact that the tax reduction measures are scattered and segmented and do not form an overall package of tax reduction program, which causes low reform efficiency. Some reforms are conducted unknowingly and people cannot feel the effects of tax reduction. The structural tax reduction shall continue in the next few years. Although the structural tax reduction reform is complicated, cumbersome and difficult, we cannot reform whatever we want, and we should have an overall tax reduction program to ensure the reform can play comprehensive effects.

1. To design overall structural tax reduction program and develop a thorough timetable.

To design an overall structural tax reduction program according to the requirements of economic and social development on tax reduction, to strengthen top-level design and attach great importance to scientific nature of structural tax reduction. To combine the structural tax reduction with keeping steady growth, controlling commodity prices, adjusting structures, benefiting people, focusing on reforms and promoting harmony; to develop the total amount control of structural tax reduction; to clearly define the specific implementation timetable of adjusting goal and to strengthen the implementation and actual results.

2. To focus on turnover tax adjustment and optimize the tax structure.

Value-added tax and business tax are the most important tax types in turnover tax. The taxpayer is the seller of goods labor. The theoretical tax bearer is consumers. However, repeated taxation exists in business tax. Therefore, we should continue to increase the pilot scope for change of business tax to value-added tax^[7], give full play of neutral advantages of value-added tax and ensure the horizontal equity among taxpayers, reduce taxes comprehensively so as to further reduce general price level, reduce burden on consumers and promote consumption. In addition, considering the substantial fairness, it is recommended that design of value-added tax rate should be simplified as much as possible and the tax rate grade should be reduced after the pilot change from business tax to value-added tax. Otherwise, the horizontal fairness among the industries shall cease to exist, and the tax neutrality of value-added tax shall disappear. Meanwhile, as the reform changes business tax belonging to local finance to value-added tax, the national tax system reforms should be considered to ensure the local financial strength.

Consumption tax as a tax levied selectively has large tax reduction space and possibility. As the consumption rate of some goods in China is high, and many foreign markets are open, overseas shopping, online shopping, overseas purchase by agents and other shopping methods appear to circumvent domestic consumption tax, which is actually the loss of national revenue. Therefore, we can consider reducing consumption tax rate[8] and promoting consumption.

As to tariffs, especially import tariffs , attention is paid to relationships between tariff reduction and compliance cost of taxpayers. In recent years, the State has reduced tariffs on import goods many times. Tariff reduction is beneficial to some degree but if it is too frequent, the enterprises will be unable to adapt quickly, which not only increases the compliance cost of the enterprises but also makes the national tax reduction measures not serious.

3. To continue to promote personal income tax reformation and promote resident income increase while ensuring fairness.

The personal income tax reform of 2011 improves salary and income expense deduction standard and adjusts tax rate table, which achieves the tax reduction effects for some middle and low income earners. However, the tax reduction contribution in stimulating consumption is not obvious. In the long term, it should be directed at a comprehensive personal income tax reform. It shall comprehensively consider rising price, the burden of taxpayers, regional differences and other design factors when designing a tax collection program; the principle of quantity burden must be sufficiently reflected to protect the fair tax payment and to promote the resident income increase.

Conclusions

The structural tax reduction is a long-term, continuous and comprehensive project that cannot be done overnight. During reformation, we need to pay attention to issues at hand, but more importantly, we should attach more importance to long-term issues; we need to pay attention to conditions of particular areas and regions, and we should consider the overall conditions; we need to make full use of tax collection methods consider using other relevant means comprehensively, using budgetary and monetary policy and other control tools to support the tax reduction policy to produce greater effects at the same time.