Chinese Export Tax Rebates Having Limited Impact

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

29 July 2009

A continuing fall in the volume of exports and deteriorating fiscal conditions are forcing the Chinese government to rethink its policy of providing valuable tax rebates to exporting industries.

In order to encourage growth in China’s exports, companies are allowed to claim back value-added tax paid on materials used in the production of goods which are ultimately exported. In June, Beijing increased VAT rebates on exports on almost 3,500 products, but with the sluggish global economy depressing international demand for Chinese products – exports are forecast to fall by 10% in the second half of the year - the rebates, which range from 5% to 17%, appear not to be having the desired effect.

This fact was seemingly confirmed by one senior government economist, who, quoted by the Shanghai Securities News, said that there is “no room” for further increases in export rebates this year. Instead, the government is more likely to focus on improving credit conditions, he added.

Senior government figures including Vice Premier Wang Qiashan and Finance Minister Xie Xuren have recently placed renewed faith in China’s stimulus plan after economic growth figures for the second quarter of the year turned out to be better than expected. But, on the other hand, China has, to some extent, entered uncharted fiscal waters, having seen strong tax revenue flows reduced to a relative trickle over the last six months, contributing to a CNY950bn (USD139bn) budget deficit this year – a record high. Therefore, efforts to stimulate the economy are being balanced against the need to cut costs, and any further tax cuts are likely to be highly targeted for maximum effect. Indeed, First Vice Premier Li Keqiang has directed local governments to tighten their belts and maximise revenue flows, while the State Administration for Taxation has begun to pressurize large companies to ensure that they are paying all the taxes that they legally owe.

While China’s budget deficit, at less than 3% of GDP, is manageable (the United States is facing a federal deficit of almost 13% of GDP this year), the fiscal trends are not favourable. Tax revenues declined by 2.4% in the first half of 2009 compared to the same period last year, well shy of the government’s target of 8% growth. What’s more, expenditure increased by 26.3% over the same period. There are also worrying signs that China’s level of debt is not as comfortable as first thought, having risen, analysts suggest, to about 60% of GDP, against an official figure of 17.7% at the end of 2008 - a figure which does not factor in the vast amounts spent by the government on securing the nation’s banking system and propping up local governments.

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