China’s proposed new VAT law faces second review, hopes to alleviate burden on enterprises
- Standing Committee of the National People’s Congress (NPC) will conduct a second reading of China’s proposed value-added tax (VAT) law by Friday
- Changes include improvements to the system for small-scale taxpayers and more refund methods
Revisions to China’s proposed value-added tax (VAT) law will be considered by legislators this week, with hopes that they will make it easier for policymakers to extend preferences for taxpayers and alleviate the burden on enterprises.
The second reading of the revisions to the proposed law, which covers the central government’s largest revenue source, will be conducted by the Standing Committee of the National People’s Congress (NPC) by Friday.
Last year, VAT revenue in China reached around 4.87 trillion yuan (US$669 billion).
Since the first draft of the law was released in December, the Standing Committee has added improvements to the system for small-scale taxpayers – generally defined as having an annual taxation base of below 5 million yuan - to offer a simpler method of tax calculation and also offered more refund methods.
The updated draft also includes delegating certain power for the State Council to formulate the requirements of tax incentives, while also clarifying the scope for simplified tax calculations.
“The VAT effectively reduces the tax burden on enterprises … the draft law has absorbed the reform achievements of the VAT credit refund in recent years,” said Yang Heqing, a spokesman for the legislative affairs division under the NPC Standing Committee.
Weak fiscal revenues and sagging market confidence amid China’s waning economic momentum have led Beijing to review its tax policies.
It previously revamped VAT – a tax based on the value-added during the flow of goods – in 2016 by absorbing business tax – a key source of local government revenue – and turning it into a revenue shared with the central government.
The financial constraints of some local governments and the lack of financial resources in the tax refund process have led to difficulties in refunding taxes
It differs from the US, where taxes are mainly collected when goods are sold, while China’s method has some similarities with systems in Europe.
In 2019, Beijing introduced a VAT refund policy, which aimed to alleviate corporate burdens and improve cash flow.
However, local implementation has progressed as many debt-laden authorities were unable to pay.
“The financial constraints of some local governments and the lack of financial resources in the tax refund process have led to difficulties in refunding taxes, which has actually happened in some regions,” said Zhao Xijun, a finance professor at Renmin University.
China’s private sector has been caught between tight financing and low confidence amid strict coronavirus control policies for the past three years, which forced Beijing to provide nationwide tax refunds, he added.
Tax cuts totalled 2.5 trillion yuan (US$343 billion) last year, including 1.5 trillion yuan from VAT refunds.
According to Zhao, one of the dilemmas that the current tax policy has to deal with is finding a balance between local revenues and business incentives.
“The current refund policy will put more fiscal pressure on [local governments], and this policy needs some refinements and adjustments now,” Zhao added.
In the first seven months of the year, fiscal revenues rose by 11.5 per cent, year on year, to 13.9 trillion yuan, according to the Ministry of Finance.
This sharing ratio between the central government and local governments puts a heavy burden on local finances
Tax revenues stood at 11.75 trillion yuan, representing an increase of 14.5 per cent compared with the same period of last year.
“This sharing ratio between the central government and local governments puts a heavy burden on local finances and makes it difficult for governments to refund the taxes that should be given back to businesses at the required time,” said Zhang Jiuhui, a professor at the Cadre College of State Taxation Administration in Dalian.
Under the current refund scheme, local governments are required to cover 50 per cent of refunds and local businesses 15 per cent.
China also needs to set the scale of tax refunds based on local revenues and review the distribution between central and local finances, Zhang said in an article published in August 2022.
It also needs to lower the threshold for tax refunds for newly established enterprises to address their shortage of capital in order to “enhance market confidence and expectations”, Zhang added.
