Lifting of levies on capital equipment investment should spur spending but it could heighten fears of economic overheating Mainland reforms that eliminate taxes on investment in equipment are expected to help company profits, but they could also contribute to an overheating economy. The central government has agreed to slash capital investment taxes to zero for eight key industries in the northeastern part of the country starting this year. If successful, the programme will be rolled out nationally by next year. The changes are part of a plan to reform the mainland's cumbersome tax system, which relies more than most countries on taxes on products throughout the production chain - value-added taxes - instead of at the point of sale. However, the reforms come at a time when the government is trying to balance the needs of improving financial efficiency while preventing certain sectors of the economy - including property development and car manufacturing - from expanding out of control. The elimination of the tax would save 17 per cent of a company's investment in equipment and stimulate further purchases of heavy goods, according to Ho Khoon-ming, a partner at KPMG in Beijing. For high-technology companies with heavy upfront expenditure on equipment the savings could be as much as 8 per cent of total costs. 'Clients welcome this new policy. It will encourage them to invest more in equipment and improve their bottom line,' he said. The eight targeted industries are equipment manufacturing, petrochemicals, metals, shipbuilding, cars, high technology, military equipment and agricultural processing. Mr Ho said he had been approached by manufacturers of telephones and cars hoping to take advantage of the new tax environment. Investment in fixed assets - from machine tools to copper smelters - is one of the main drivers of economic growth in China. After dipping below 10 per cent in 2000, growth rates in fixed-asset investment have soared, rising by more than 20 per cent, or US$500 billion, in 2002, of which about 10 per cent came from foreign companies. More recently, in November, investment in fixed assets rose 25 per cent year on year, up from the 22 per cent pace in October. Economists warned that the impact of the new tax laws would be slow to filter through the system mainly because there were many problems in northeastern China, such as a lack of water, inefficient management and ageing infrastructure, that were likely to delay investment. 'The first step is to motivate people to invest there,' Morgan Stanley China economist Andy Xie Guozhong said. Another concern has been the possible loss of tax revenue to the government because value-added taxes account for about 30 per cent of revenue. However, Citibank China economist Huang Yiping said a decline of 30 billion to 60 billion yuan over the next few years, or 1.5 per cent to 3 per cent of total revenue, would be offset by the rise in taxes related to the economy. Tax revenue has risen between 14 and 22 per cent annually over the past five years.