Being accused of falsifying data is a big taboo for Chinese government cadres. Yet, three provinces — Liaoning, Jilin and Heilongjiang– recently admitted that they’ve been falsifying GDP data for a long time.
What happened is that under a new tax rule, it’s better for local governments to come clean.
Business tax had been based on turnover, until the VAT reform that came into effect this year.
The VAT tax reform is to align the nation’s tax system with international standards, as it makes more sense to tax companies based on the value added, rather than turnover, given varying profit margin of different industries.
In the past, local governments had full autonomy on the business tax revenue, which was classified as a local tax. Now business tax has been replaced by VAT tax, which is to be spilt fifty-fifty between local and central governments.
The fact is VAT is highly correlated with GDP data, and this is where the problem arises.
It’s widely known that China’s economic data has a shaky reputation. The performance of local government officials was typically assessed on local GDP growth rate. Therefore, the officials had strong incentives to fabricate GDP data in order to get promotions.
In particular, data falsification was more rampant in underdeveloped inland provinces.
Under the new rule, the higher GDP figure local governments report, the higher the VAT tax revenue they have to share with central government, which has probably prompted the three provinces to make a bold revelation of their data falsification.
On average, Liaoning, Jilin and Heilongjiang have inflated local fiscal data by up to 20 percent.
Coincidentally, local governments have been going through a leadership reshuffle. Hence, it’s a good opportunity for newly-promoted officials blame the problem on their predecessors.
This article appeared in the Hong Kong Economic Journal on Jan 22
Translation by Julie Zhu
[Chinese version 中文版]
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