China Forges Ahead With Fiscal Stimulus

by Mary Swire, Tax-News.com, Hong Kong

29 July 2009

Chinese leaders have said that efforts to stimulate the economy through infrastructure spending, tax cuts and subsidies will continue through this year despite an alarming fall in tax revenues.

The latest set of economic figures to emerge from China show that the expansionary fiscal policies are bearing fruit, with the country’s gross domestic product having grown by 7.9% in the second quarter of 2009, up from 6.1% in the first quarter. The figures have been acknowledged by key figures in the Chinese government, including Vice Premier Wang Qiashan and Finance Minister Xie Xuren, who have credited the stimulus package put in place last year with reviving the country’s economic fortunes.

The stimulus package was announced in November 2008 and, at CNY4 trillion (USD585.5bn), is smaller than President Obama’s flagship Recovery Act, which weighed in at a hefty USD787bn, including about USD220bn in tax cuts, but which has yet to have any discernible effect on the US economy.

However, the global nature of the economic downturn has not left China totally unscathed as demand from other countries for its products has fallen, and this has had a noticeable effect on the tax take.

After successive years of record tax hauls, the government reported in April this year that tax revenues dropped by over 10% in the first quarter of 2009 compared with figures recorded for the same period in 2008. A decline in corporate earnings, falling prices and numerous tax cut packages were all contributing factors to the drop, the finance ministry reported.

Figures for the first half of 2009 show that tax receipts fell by 6% compared to the same period last year, with corporate income tax revenues dropping by almost 14% to CNY682bn.

Falling tax receipts from the corporate sector have led to a renewed drive by the country’s tax authority to improve corporate tax compliance, and the State Administration for Taxation recently took the unprecedented step of issuing notices urging companies to tighten their tax accounting procedures to ensure that they are not paying less tax than they should. The notices were directed at about 100 of the largest companies operating in China, and those that declare amounts of underpaid tax voluntarily will escape penalties.

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