Emptier state coffers seem a taxing burden

WITH half the world anxious to commit serious investment to China, the country seems curiously determined to squander all the goodwill that is part of the process of attracting funds.

After telling foreign investors early in the year that the value-added tax (VAT) for raw materials used in manufacturing exports would be refunded, it has gone back on its word.

Contrary to the VAT law implemented in January as part of the biggest tax overhaul since 1949, foreign-invested enterprises (FIEs) will not be refunded for the VAT on domestic inputs used for manufacturing exports.

The 180-degree turn must have come as a surprise to FIEs which, in line with international practice, are generally not taxed on the raw materials which go into exports.

Some analysts believe the about-turn has something to do with the shortfall in tax revenue going into state coffers.

Even if that were true, it does Beijing little good to renege on its promise, especially when the competition for funds is hotting up despite the obvious attractions of investing in China.


Worse, at a time when China needs to boost its foreign exchange earnings, the U-turn will affect the competitiveness of its exports, 40 per cent of which are accounted for by FIEs and a few smaller non-state enterprises.

The about-turn, however, highlights the urgent need for Beijing's tax man to work out a comprehensive tax system which brings more businesses into the tax net.

Despite the lack of estimates, it is no secret that China's burgeoning underground economy hardly pays any taxes.

Indeed, in many cases, the practice is carried out right under the local taxman's nose.


Thousands of getihu (small private enterprises) have sprouted throughout the country, creating immense personal wealth for the daring and enterprising.

Yet, few understand the need and obligation to contribute to the tax system.


It may be expedient - but unwise - to go for those already paying taxes to make up for any shortfall in tax collections.

The long-term and fairer alternative is to ensure stricter compliance of tax payments by individuals and to bring more companies into the tax net.

If that means having to set up a penalty system widely practised elsewhere, so be it.