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China’s tax reform a significant economic driver

Updated: Dec 16,2017 2:20 PM Daily

China has continued to cut taxes and fees over the past few years, with the reform of replacing the business tax with a value-added tax (VAT) being the backbone, which has been contributing greatly to supply-side structural reform, mass entrepreneurship and innovation, lowering costs for real economy enterprises, and the optimization of business environment, Economic Daily reported on Dec 5.

Multiple tax and fee reduction policies implemented

A broad spectrum of tax reduction polices have come into force, including advancing VAT reform, expanding the coverage of preferential tax policies for small and micro-sized businesses, and increasing incentives for innovation-based tech firms.

China is leading tax reduction among other major economies. VAT reform, bearing the most importance, contributed to reductions totaling 1.7 trillion yuan ($257.31 billion) since its implementation in 2012, said Liu Shangxi, director of the Chinese Academy of Fiscal Sciences.

Aside from cutting taxes, China has been stepping up fee reductions. According to statistics, cancellation, reduction, and exemption have been made on 1,363 governmental funds and administrative service fees at all levels since 2013, relieving social burdens by 367 billion yuan annually.

New growth drivers injected by tax reform

VAT reform, as a key measure of supply-side structural reform, has achieved an all-around tax reduction in industries across the board, persistently driving economic transformation and upgrading. Meanwhile, it also acts as a pronounced catalyst for optimization of industrial division, extension of industrial chains, upgrade of manufacturing, and development of the services industry.

Besides VAT reform, the government has also launched a slew of tax reduction policies to lower costs for the real economy and boost its development. For example, since the beginning of this year, enterprises with profits under 500,000 yuan have become eligible for tax cut incentives for small and micro-sized business, instead of the previous 300,000.

The contribution of tax reductions to innovation is also worth noting. Tax cuts worth 220 billion yuan were made for technology and innovation in the first three quarters, up 50 percent.

Additionally, people’s well-being also benefited immensely from the policies. “Effective tax reduction helped with the balance between income and expenditure, which could be seen in the continuing growth of financial expenses in pension insurance and medical care,” said Liu Shangxi.

Tax reduction underpinned by ongoing tax reform

The State Council this month abolished the provisional regulations for business tax and amended regulations for value-added tax, which legalized the achievements of VAT reform. “VAT reform will be at the core of further tax reductions,” said Liu Yi, a professor from the School of Economics at Peking University.

“China’s taxation reform is, in essence, tax reduction. It not only relieves burdens for enterprises, but also brings in an equal playing field for them, as the market will play a decisive part in resource distribution in this case. Meanwhile, supply-side structural reform will be greatly propelled,” said Liu Shangxi.