China To Begin Overhaul Of Taxation System

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

16 January 2004

After announcing a massive 20% increase in tax revenues on Tuesday, China’s chief tax official Xie Xuren warned that revenues may fall in the coming year as the government manoeuvres into place a package of tax reforms aimed at boosting long-term competitiveness.

Two key areas of the reforms will exempt firms from VAT on equipment purchases, currently levied at 17%, and unify corporate tax for both domestic and foreign businesses.

The VAT scheme is to be piloted in eight industries in China’s ‘rustbelt’ north eastern industrial zone (including Liaoning, Jilin and Heilongjiang) in order to help foster investment in new technology. The measures were due to go into force on January 1st this year.

In a press conference, Xie commented that the VAT measures will probably lead to a short-term reduction in government revenues, although they will ultimately lead to an increase in investment and competitiveness.

Lou Jiwei, vice-minister of finance, explained to the Financial Times last year: "This means the tax base will be shrunk, so if we want to increase revenue that means we have to increase the tax rate, which we are quite reluctant to do."

However, the minister added: “This kind of reform will...stimulate the economic enthusiasm of enterprises."

Other measures mentioned by Xie included a plan to introduce a fuel consumption tax to replace road maintenance fees, which has entered the final stage of legal approval, and experimental changes to rural taxes with the aim of unifying them with urban tax systems.

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