Yang Chongchun, deputy director of the State Administration of
Taxation, recently gave his views on an upcoming tax policy
adjustment that has raised questions among people in the business
community and average Chinese citizens alike. For example: Will a
tax cut policy be possible with the state trying its best to
stimulate domestic demand? How will the State Administration of
Taxation adjust the value-added tax? What about the need, according
to the State Administration of Taxation, of hammering out an
inheritance tax? What revisions will be made to personal income
tax? When can domestic and foreign enterprises be included in the
same corporate income tax system?
"I
would prefer a timely, appropriate tax policy adjustment rather
than a general 'tax cut'," said Yang who objects to the application
of a tax cut as being too broad and unsuitable for the present
economy.
"The taxation rate in China isn't in reality a high one. Take
income tax as an example, the actual tax rate is a little bit over
20 percent though its prescribed rate stands at 33 percent. And the
government collects 17 percent tax on the value-added tax, the
largest circulation tax in China -- actually less than 17 percent,"
Yang Chongchun said.
Fixed-asset investment cannot offset the amount of value-added tax.
The policy was adopted in 1993 to cool overheated investment. Now
that investment is lagging, the policy should be modified, said
Yang.
Though the country may see a loss of 50 to 60 billion yuan (US$6.04
to 7.25 billion), if fixed asset investment is allowed to offset
value-added tax, enterprises will see an increase in their capital
for production expansion, renovations and technological
improvements. State tax revenue will also surge when fixed-asset
investment turns out to boost corporate performance revenue. And
domestic and foreign enterprises will operate under the same rules
for fairer competition.
Enterprises are now under a heavy financial burden, according to
Yang. The country collects about 160 billion (US$19.3 billion) yuan
in taxes from enterprises, accounting for 15 percent of the gross
domestic product (GDP). Administrative fees collected according to
state rules from enterprises account for 7 to 8 percent of GDP
while many unauthorized charges account for 5 to 8 percent.
Enterprises contribute about 27 to 30 percent of GDP.
"We should first rule out all unauthorized charges, subtract
unreasonable fees and adjust inappropriate parts of tax policy on
enterprises only then can we alleviate the heavy burden on
enterprises," Said Yang.
Inheritance tax law is brand new to Chinese people who for
thousands of years have taken it for granted that all their earthly
goods will go to their offspring without any tax or fees to the
state. The inheritance tax is an important part of the impending
taxation system reform, according to Yang. After income taxes,
people usually have belongings to leave their heirs or donate to
others. It is necessary to hammer out an Inheritance Tax Law to
work with taxation of personal income.
"Inheritance tax is a tax closely connected with personal income
tax. It is necessary to set up such a tax. But when and how to
impose this tax has not been decided and will be deliberated at a
later time," Yang said.
It
is "high time to consider revisions" in the present Individual
Income Tax Law since the law took effect 20 years ago and great
changes have happened over the intervening years, Yang said. "Basic
revision work has been finished and several draft revisions are now
under the review of concerned administrative departments."
Debates about the revisions mostly focus on two issues, the tax
rate and the limit on non-taxable income. China has nine tax
brackets based on personal income ranging from 5 percent to 45
percent. According to a survey cited by Yang, 85 of a total of 90
countries surveyed have adopted a progressive tax rate, and 21 of
those 85 countries have fewer than five tax brackets.
"The nine tax brackets on personal income tax may be adjusted, for
example, to six," Yang said.
Though the nominal benchmark of non-taxable income is 800 yuan
(US$96), Shenzhen adopts 1,600 yuan (US$193) and Beijing adopts
1,000 yuan (US$120) as their own limits. The total revenue from
personal income tax has increased from 7.2 billion yuan (US$870
million) in 1994, 1.42 percent of total tax revenue, to 99.5
billion yuan (US$12 billion) in 2001, 6.5 percent of national tax
revenue.
"The personal income tax plays an outstanding role in national tax
revenue. But personal income tax will be more efficient, and also
it will necessarily play a bigger role in regulating social
wealth," Yang said. He added: "According to our estimates, an
appropriate increase from the 800 yuan (US$96) benchmark, for
example, to 1,000 or 1,500 yuan (US$120 to 180), will help
alleviate the tax burden on people in the lower income bracket with
a reasonable levy of a bit more on high income earners while
causing no big loss in state tax revenue."
World Trade Organization rules call for fair competition
environment for every enterprise. This is a great opportunity to
speed up a combination of corporate income taxes [domestic and
foreign enterprises] into one. Though that means foreign
enterprises which have enjoyed preferential tax policies since the
late 1970s may have to lose an advantage, Yang doesn't think it
will affect China's investment environment.
"The corporate income tax will be likely set at 24 percent while
neighboring countries set it at about 35 percent, so China will
still be seen as promising, attractive to investors. And the
combination, in my mind, also will not adversely impact state tax
revenue," Yang said.
(粵港信息日報 [Canton and Hong
Kong Information Daily], March 12, 2002, translated by Alex Xu for
china.org.cn, April 3, 2002)