OpinionTax breaks a welcome boost for China's small businesses
Hu Shuli says decision to temporarily waive VAT and business taxes for companies with modest turnovers should become a permanent measure
Owners of small mainland businesses will no doubt welcome the State Council's decision to waive value-added and business taxes for those with monthly sales turnover below 20,000 yuan (HK$25,000) as a pilot for a longer-term plan. It is expected to benefit more than six million small businesses, and will have a profound impact on the economy if made a permanent policy.
The central government is employing a proactive fiscal policy at a time when economic growth shows signs of slowing rapidly. Rather than resorting to the past policies of massive bond issuance or expanded investment projects, policymakers are cutting taxes further and delegating political powers in an effort to stimulate the private-sector economy.
This macro-oriented economic policy is similar to the ideas of supply-side economists who advocate pragmatic economic approaches, which are likened to "supplying water for fish to grow".
Economics tells us that increasing taxes could simply crowd out investment by businesses, while cutting taxes could stimulate investment and consumption. But the tax cut for small businesses would only lead to a reduction of no more than 40 billion yuan a year, or about 13 billion yuan from August to the end of this year.
If the VAT replaces business tax this year, the total tax cut for this year would reach about 120 billion yuan, or only 1.1 per cent of the country's 12 trillion yuan in public revenues this year. Bigger tax cuts should therefore be made possible if the country seeks to make stable growth and employment a macroeconomic policy.
The current economic imbalance in the country has stemmed mainly from over-investment, overcapacity and inadequate consumption. So cutting VAT as the top source of tax revenues may work wonders.
Since consumers eventually pay VAT, relieving their tax burdens could help boost consumption, business investment and production. According to experts, lowering the standard VAT rate from 17 per cent to 15 per cent would lead to a fall in tax revenues of 500 billion yuan a year, thus effectively driving economic activities.