Chinese Government Faces Demands For VAT Reduction

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

29 January 2002

A Chinese government think-tank has proposed new tax breaks for mainland businesses in order to allow them to compete more effectively with their foreign rivals.

The Chinese Academy of Social Science announced earlier this week that many mainland enterprises are suffering as a result of the country's recent accession to the World Trade Organisation, and called for reductions in VAT on certain products for local companies, in order to make them more competitive.

VAT has been a major source of revenue for the Chinese government since the tax system was last overhauled in 1994, and at present is levied at every stage of the business chain. The effective rate of taxation is around 13%, due to existing tax cuts on selected products, but the Acandemy of Social Sciene believes that more concessions should be made.

'Capital-goods investments should be exempted from value-added tax, that will reduce the domestic enterprises' burden,' explained Liu Xiahui, a researcher with the government think-tank.

There have been reports that the Chinese authorities are considering shifting the emphasis of VAT collection from production to consumption, but given that collection figures continue to improve, showing a year-on-year rise of 16.8% according to recently released figures, it seems unlikely that Beijing will make any sudden or dramatic changes.

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