China’s biggest tax reform for 20 years set to buoy growth
China’s biggest tax overhaul in more than two decades starts on May 1, with changes set to reduce the burden on services companies and encourage factories to upgrade and innovate.
Under the new system, taxes in the construction, property, finance and consumer service sectors will now be applied to the value added, such as the difference between wholesale and final sales price for a retailer. That is in contrast to the existing revenue-based levy.
It can drive demand and create favourable conditions for modern service industries and small businesses
Manufacturers, which already operate under a value-added tax structure, will now get tax breaks on research and development to help them modernise.
The plan will ease corporate payments by 500 billion yuan (US$77 billion) this year, with much of that total coming at the expense of local governments.
The central government plans to further expand its budget deficit to help cover the shortfall and may redistribute some value-added tax (VAT) revenue back to the provinces.
The new plan mixes fiscal stimulus in the form of an effective tax cut for some businesses – especially those in services and retail – with structural change aimed at helping low-end manufacturers upgrade and retool factories and research new technologies seen as key to China’s economic future.
