China will further raise the extra tax deduction on research and development (R&D) expenses of manufacturing firms, to incentivize business innovation and advance industrial upgrading, the State Council executive meeting chaired by Premier Li Keqiang decided on March 24.

The principal role of enterprises in making innovations should be better harnessed. More market-oriented, equitable and inclusive support policies will be employed to better motivate the business sector and other private actors to scale up their R&D spending. This will help boost the momentum of economic growth and improve the economic structure.

The intensity of the tax break of extra deductions on R&D expenses has been raised in recent years, which has effectively supported corporate innovation.

"This institutional arrangement is the largest in this year’s structural tax cuts. Boosting R&D input from society with tax incentives and market-oriented means is an effective way to stimulate technological innovation," Premier Li said.

To implement the tasks outlined in the Government Work Report in support of business innovation, the ratio of extra tax deductions on enterprises’ R&D costs have been raised from 75 percent to 100 percent, starting Jan 1 this year. This means that for every 1 million yuan spent on R&D, a company will see 2 million yuan deducted from its taxable income.

This policy is expected to reduce corporate taxes by another 80 billion yuan this year, on top of the 360 billion yuan in tax cuts last year.

"There is still room for further scaling up this policy. Deeper tax cuts can be introduced as things develop," Premier Li said. "We should accumulate experience along the way and simplify the procedures step-by-step."

The calculation method in the tax deduction of R&D costs will be reformed. Enterprises may choose to benefit from the tax incentive on a semi-annual basis, allowing R&D spending in the first half of the year to be deducted during the prepayment of corporate income taxes in October, rather than during its settlement in the next year. The reform aims to let enterprises benefit as early as possible.

Preferential tax policies should also be weighed for R&D service providers, innovation firms and business startups.

Efforts will be made to strengthen policy advocacy, improve tax services and streamline review processes, to make it easier for enterprises to benefit and see that the policies are effectively executed.

"It is important to further encourage companies to increase R&D input. Investing more in R&D will help companies bolster their growth potential," Premier Li said.