China will unveil larger-scale tax cuts and tax exemptions for micro and small enterprises (MSEs), a State Council executive meeting chaired by Premier Li Keqiang decided on Jan 9.

Further tax and fee cuts reflect intensified implementation of the proactive fiscal policy and are an important step in deepening supply-side reform. At the annual Central Economic Work Conference held in December 2018, President Xi Jinping stressed the need to introduce tax and fee cuts on a larger scale and more inclusive tax breaks for MSEs. Premier Li Keqiang said at the conference that MSEs, as major job creators, should be given priority in such tax cuts.

Reducing tax burdens for MSEs has been on the agenda of the State Council’s executive meetings four times throughout 2018. Statistics from tax authorities show that from January to November 2018, tax cuts for MSEs totaled 184 billion yuan ($27 billion). These tax cuts have helped to lower the cost of entrepreneurship and innovation and help businesses gain vitality, create more jobs and ease their financing woes.

“Amid increasing downward pressure, it is essential to introduce tax and fee cuts for small and micro firms, as this will be conducive to boosting employment and shoring up private businesses at the same time,” Premier Li said.

The meeting rolled out a host of inclusive tax breaks for MSEs. The eligibility of small and low-profit businesses to benefit from preferential corporate tax will be significantly expanded, and deeper cuts on corporate tax will be introduced. Small and low-profit businesses with an annual taxable income of less than 1 million yuan and between 1 million and 3 million yuan will be eligible to have their tax calculated based on 25 percent or 50 percent of their taxable income. This is expected to reduce tax burdens of such enterprises to 5 percent and 10 percent. The adjusted tax incentives are expected to cover 95 percent of corporate tax payers, 98 percent of which will be private businesses.

At the same time, VAT threshold on small-scale tax payers, which mainly includes MSEs and individual businesses and other types of individuals, will be raised from 30,000 yuan to 100, 000 yuan of monthly sales.

Provincial-level governments will also be given the authority to cut taxes up to 50 percent for small-scale VAT taxpayers under several local tax items, including resources tax, as well as education and local education surcharges.

The scope of tax incentives applied to investment in high-tech start-ups will be expanded to give more tax breaks to venture capital firms and angel investors investing in these businesses.

At the same time, central government finance will provide stronger general transfer payment to local authorities to make up for possible funding gaps at local levels caused by large-scale tax and fee cuts.

The tax incentives will cover all taxes incurred since Jan 1, and will be effective for a tentative three years. They are expected to save about 200 billion yuan for small and micro businesses every year.

“Since last year, the government has spent within its means and enacted several rounds of tax incentives for small and micro firms. The latest round of tax cuts will be the most substantial so far, and it is also appropriately structured,” Premier Li said. “The government must tighten its belt to give more benefits to businesses and energize the market.”