TAX REFORM

China to simplify tax rules to shore up the economy

PUBLISHED : Monday, 06 March, 2017, 12:02am
UPDATED : Monday, 06 March, 2017, 2:28pm

China has pledged to simplify the value-added tax (VAT) regime this year to level the playing field and shore up the real economy amid complaints about the chokingly high tax burden in a slowing economy.

Premier Li Keqiang said on Sunday the government will trim the four-tier VAT regime to three levels, part of the fiscal and tax reform plan which led to a tax cut of 570 billion yuan (US$83 billion) in 2016. Li was speaking as he delivered the annual government work report at the opening session of the National People’s Congress in Beijing.

Li promised to cut the tax burden by 350 billion yuan this year, and slash administrative fees by 200 billion yuan, with more tax incentives for small businesses and research and development activities.

China completed its VAT reform on May 1, 2016, requiring the remaining four industries – finance, construction, property and consumer services – to pay VAT instead of a business tax.

Under the current tax regime, businesses face four rates based on industry classification: 17 per cent or 13 per cent for the sales or import of products, 11 per cent for transport and property lease or sale, and 6 per cent for finance, modern services and consumer services.

Yet, the overhaul did not necessarily mean tax cuts for every enterprise. Complaints over a de facto heavier tax burden, complexity and ambiguity of rules were common.

The 13 per cent rate for the sales or import of products including agricultural products, publications, and utilities could be cut to 11 per cent amid the simplification, market watchers said.

“The 13 per cent rate is likely to be dropped with the least disturbance on business and tax revenue,” said Robert Li, a PricewaterhouseCoopers tax partner in Shanghai. “Crossing off the highest 17 per cent could mean adding more pressure on tax revenue while dropping the lowest 6 per cent level could increase the burden and fan complaints rather than having the opposite effect.”

The simplification of VAT rates reflects Beijing’s drive to trim tax and support a stabilising economy against slower economic growth, Li said.

China’s economy grew 6.7 per cent in 2016, the slowest in 26 years.

While tax revenues rose 4.3 per cent to 13 trillion yuan in 2016, revenue growth has declined annually since 2010.

Beijing is aiming to trim the high contribution of indirect tax, including VAT, in its tax revenues as businesses cried out about heavy taxes and non-tax fee payments as they struggle on the brink of survival, Li said.

Indirect tax is levied despite the profitability of a business.

The view is echoed by Hu Yijian, a professor at Shanghai University of Finance and Economics, who also noted that the 13 per cent rate is likely to be cut to 11 per cent.

“The central government is taking more action to revitalise the economy by trimming taxes and fee charges,” Hu said. “We are hearing more calls for tax cuts from businesses amid an economic slowdown though different companies from different industries could have different responses.”

Industry commentators have already called for changes in tax rates, leaving more breathing room for distressed businesses.

“We could see a speed-up of the simplification as the premier has included it in this year’s government work report,” said Kevin Zhou, an Ernst & Young tax partner in Shanghai. “We are expecting a two-rate regime in the long haul.”

In developed markets there are usually two VAT rates – one for general taxpayers, the other a preferential rate.

Billionaire Cao Dewang, the chairman of Fuyao Glass, told media in 2016 that the United States was a cheaper and better place to make glass because taxes were much lower there. His comments fanned wide discussion of how taxes at home are choking businesses and eclipsing China’s position as a manufacturing haven.

The VAT overhaul, which began on a trial basis in Shanghai in 2012, is touted to ease the tax burden of services, which accounted for more than half of China’s economy for the first time in 2015 and grew at a faster pace than the whole economy.

We could see a speed-up of the simplification as the premier has included it in this year’s government work report
Kevin Zhou, EY

Meanwhile, as Beijing moves to curb the aggressive investment behaviour of insurance companies, the financial reform section of the work report has for the first time listed “broaden[ing] the channel for insurance funds to support the real economy” as a major mission.

Corporate raids led by deep-pocketed insurers in the past year have shocked the nation, while also arousing regulators’ attention on the risks caused by the mismatch of maturity between liabilities and assets.

“It’s very important that the utilisation of insurance capital has caught the attention of the central government,” said Li Daokui, an eminent economist and former member of the Chinese central bank’s monetary policy committee.

The return from investment into the real economy is unlikely to match that of riskier assets, including equities, but it would force insurers to tame their aggressive products and lower risk, Li said.

By the end of 2016, insurance fund investments in the transport sector reached 479.8 billion yuan, 244.5 billion yuan went to the energy sector, while fixed-asset investment by insurance funds reached 480.1 billion yuan, according to data from the Insurance Asset Management Association of China.

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