China's fiscal and taxation system has experienced important
changes in past decades.?
Great achievements have also been witnessed in fiscal and
taxation reforms.
The system has laid a solid foundation and provides strong
financial support for the government to effectively implement
macro-control measures.
However, the present fiscal and taxation system is only a
transitional one and cannot meet the demands brought about by the
development of a socialist market economy.
The reforms in fiscal revenue management, the expenditure
management system, and the central and local budget management
system are not complete.
The fiscal system has accumulated a lot of experience in
adjustment of the total economic volume. But it has played a weak
role in adjusting the economic structure, including the industry
structure and income distribution. The existing fiscal and taxation
systems need further reform.
Public service first
Government finance should focus on social public services,
rather than developing the economy and fostering financial sources.
The government does not need to collect money to develop the
economy first, then provide public services.
The government should rely on the market to develop the economy,
while government finance should be used to meet the expenditure
demand of the public sector.
First priority should be given to expenditure on national
defense, government administration, the provision of a basic
education, basic medical and basic social security.
Emphasis should also be given to expenditure on higher
education, science and infrastructure.
Expenditure system
In the coming decades, the ratio of government expenditure on
economic construction should be reduced. Expenditure on
infrastructure should also be gradually cut back.
Substantial reforms should be conducted on supply and management
of government expenditure for institutions in sectors such as
healthcare and higher education.
Market mechanisms should be introduced and non-government funds
should be used to develop science, higher education and part of the
healthcare undertakings.
Tax system reform
The tax system plays an important role in macro-economic
control.
The government should try to enhance the role of income tax and
raise the ratio of income tax revenue to total revenue.
This would be beneficial for the sustainable development of the
country's fiscal revenue.
It would also be beneficial for the adjustment of income
distribution.
The fiscal system could then better play the role of an
automatic stabilizer for the economy.
Since China initiated its reform and opening-up in 1979, the
government has conducted two major comprehensive fiscal and
taxation reforms, in 1983-1984 and 1994 respectively.
These reforms achieved great success, but there are also many
problems.
The third reform, which is expected to start next year, could
improve some of the existing tax varieties first, then gradually
improve the whole system.
This will help stabilize tax revenue, reduce risks and improve
the efficiency of the reform.
Value added tax
The government should first shift the current production-based
value added tax (VAT) system to a consumption-based one.
Then it should replace the business tax with VAT.
Under the existing system, fixed assets are classified as
consumer goods and are subject to the tax.
As a result, business cannot claim tax deductions for the
purchase of fixed assets such as equipment and machinery.
The system places a heavy burden on those businesses seeking to
increase their fixed asset investment, especially for those
capital- and technology-intensive companies.
But if the government shifts the production-based VAT to a
consumption-based one, it will lose 60 billion to 80 billion yuan
(US$7.2 billion to US$9.6 billion) of fiscal revenue.
The government could, however, first shift the production-based
tax to an income-based one to reduce fiscal revenue loss and later
shift the income-based tax to a consumption-based one at the
appropriate time.
Replacing the business tax with VAT is quite complicated,
because it involves the reform of the tax co-sharing system between
central and local governments.
The reform could be conducted step by step, starting with
industries such as finance and railways.
Enterprise income tax
Since China has become a World Trade Organization member, it is
imperative that the country should unify business income tax
policies.
The country currently has dual-track enterprise income tax
policies for domestic and foreign-funded companies.
The income tax rate for domestic firms is 33 percent, while that
for foreign-funded companies stands at 17 percent.
The country should implement an equitable system so that both
domestic and foreign enterprises can compete on an equal footing.
The new tax rate could be set at 27 to 30 percent.
Personal income tax
Personal income tax should become a major tax variety of any
future tax system.
The role of the tax is more important than enterprise income
tax.
The government will have to particularly focus on its
improvement.
The existing personal income tax system is unfair and has many
loopholes which tax evaders exploit.
Experts and government officials have basically reached a common
consensus on the reforms needed.
Construction of a nationwide credit-rating system and
information sharing between banks and tax departments should be
speeded up to facilitate the personal income tax reform.
Social security tax and property tax
The country should levy a social security tax at the proper
time.
Existing social security fees should be replaced by a tax and
collected by tax departments.
The government should also introduce a property tax, again at
the right time.
Along with the rapid growth of property owned by individuals,
the property tax system should be improved.
Levying of such taxes is not only beneficial for adjustment of
income distribution, but also beneficial for exploring new tax
sources for local governments.
Import and export tax and agriculture tax
Under the existing tax system, development of foreign trade
places increasingly greater pressure on fiscal revenue.
Tax rebates have resulted in a considerable threat to the
balance of fiscal revenue and expenditure.
The government should take measures to improve the existing
import tax system, tax rebate system, processing trade tax system
and management system of import and export tax.
The tax system should reduce reliance on VAT and raise the ratio
of income tax.
The government should set a sound tax rebate rate and ensure
timely repayment of tax to companies to support exports.
And it should gradually do away with the agriculture tax
system.
The government is currently placing greater emphasis on the
"tax-for-fees" reform in the rural areas and is gradually lowering
the agriculture tax rate.
The reform of the agriculture tax should eventually lead to its
abolition and a unified tax system, such as that which exists in
the cities.
Distribution mechanism
The central government should try to rationalize and regularize
the distribution relationship and management system between central
and local finance.
The local government could start by levying new taxes, such as a
property tax, to improve the local tax system.
Local governments should also be given the freedom to levy some
taxes of their choosing.
Meanwhile, the budget law should be revised at the right
time.
The government should reform the existing expenditure management
system, increase budget transparency and improve management of
expenditure.
Economic structure
The next 10 years are an important period for the Chinese
Government to build a xiaokang society.
Government finance will have to try to solve the problem of the
gap between urban and rural areas, the income gap and the gap
between east, central and western areas.
The government must help reduce the burden on farmers, raise
their incomes and increase input into rural areas.
The government should also effect a series of measures,
including tax breaks and payment transfer, to support development
in central and western areas.
Today, China's economy has entered a new period of rapid growth.
Market forces have begun to play an important role in propelling
economic growth.
In the coming five years, the necessity to fuel the economy
through a pro-active fiscal policy will weaken.
The existing fiscal policy should be phased out to reduce the
fiscal deficit and the volume of treasury bonds issuance.
The authors are researchers with the State Council's Development
Research Center.
(China Daily July 21, 2003)