World Economy

China Tax Reform to Buoy Growth

China Tax Reform to Buoy GrowthChina Tax Reform to Buoy Growth

China’s biggest tax overhaul in more than two decades starts on May 1, with changes set to reduce the burden on services companies and encourage factories to upgrade and innovate.

Under the new system, taxes in the construction, property, finance and consumer service sectors will now be applied to the value added, such as the difference between wholesale and final sales price for a retailer. That is in contrast to the existing revenue-based levy, Xinhua reported.

Manufacturers, which already operate under a value-added tax structure, will now get tax breaks on research and development to help them modernize.

The plan will ease corporate payments by 500 billion yuan ($77 billion) this year, with much of that total coming at the expense of local governments.

The central government plans to further expand its budget deficit to help cover the shortfall and may redistribute some value-added tax revenue back to the provinces.

The new plan mixes fiscal stimulus in the form of an effective tax cut for some businesses–especially those in services and retail–with structural change aimed at helping low-end manufacturers upgrade and retool factories and research new technologies seen as key to China’s economic future.

“If it’s implemented well, it’s a tax cut, and it could have a substantial impact on the economy,” said Larry Hu, head of China economics at Macquarie Securities in Hong Kong.


“It’s more about longer-term economic restructuring than a short-term boost, because shifting from the business tax to VAT will end discrimination against services companies, helping the economy to rebalance.”

That could mean a further boost for services, which made up more than half of gross domestic product for the first time last year and are growing faster than the rest of the economy.

Industries including logistics, broadcasting and aviation already are subject to VAT. Putting all companies and industries under the same tax regime “will generate a massive tax cut for businesses and add incentives to the real economy”, said Jin Dongsheng, a researcher at the State Administration of Taxation in Beijing.

Yet not everyone benefits from the new regime. Local governments are poised to lose 125 billion yuan to 250 billion yuan next year, according to Iris Pang, senior economist for greater China at Natixis, in Hong Kong.

The construction, property, finance and consumer service sectors contribute 80% of China’s total business tax revenue, which in turn accounts for about 40% of total provincial government revenues.

The central government plans to expand its fiscal deficit-to-gross domestic product ratio to 3% this year, in part to help plug that gap.