24 June 2019
VAT produced 93.97 billion yuan in tax savings for Chinese companies in the first 10 months. Photo: Reuters
VAT produced 93.97 billion yuan in tax savings for Chinese companies in the first 10 months. Photo: Reuters

POLICY WATCH: More needed to prep tax system for modern economy

China’s taxation system lags its ambitious plan to develop a modern service economy, with a much heralded value-added tax (VAT) yet to find its way into key industries.

The present tax regime is not ready for a planned upgrade of the industrial sector until improvements are made to its implementation and application, said Wang Jun, head of the State Administration of Taxation, writing in the Communist Party-backed Quishi Magazine.

Wang said VAT, which replaced business tax, has yet to be implemented in certain key sectors, hampering efforts to develop a modern service industry.

Also, a resource tax and an environmental protection tax have fallen short of public expectations about building a green, energy-efficient economy.

The government will improve the taxation system to ensure the success of China’s transition from an investment-led, export-driven economy to a consumption-based model, he said. 

Among the key considerations is a fairer application of various levies and taxes to make them an effective vehicle for allocating income more equitably.

A fairer taxation system is a pillar of social justice and harmony, Wang said. At present, however, direct tax constitutes a small proportion in relation to indirect tax.

For example, under the personal tax mechanism, high-income earners don’t pay proportionate taxes. That has become a source of social conflict, exacerbating tensions between rich and poor.

Tax on polluters

Consumption tax will be expanded to luxury items and pollution-causing goods and fees will be unified as part of recurrent revenue.

Last year, consumption tax raised 787.56 billion yuan (US$129 billion), 7.8 percent of national tax revenue. It was the fourth biggest revenue earner after value-added tax, corporate income tax and business tax, Ministry of Finance data shows.

China has been replacing business tax with value-add tax in selected industries across the country. That has helped companies avoid double taxation and cut costs, enabling them to offer lower prices, ultimately stimulating consumption.

VAT resulted in tax savings of 93.97 billion yuan (US$15.31 billion) for businesses in the first 10 months of the year. Among the early beneficiaries are the transport industry and the service sector.

Wang said the government will step up legislation on property tax so that it can be implemented at the appropriate time, as well as accelerate reform of resource tax.

Last year, the government began collecting resource tax on crude oil and natural gas based on value rather than volume, helping boost fiscal revenue.

Changes to the tax code are also intended to smooth the process after the central government decided to take over certain fiscal expenditure from local governments to ease their financial burden.

– Contact the reporter at [email protected]



EJ Insight writer

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