New Chinese Tax Regime Expected To Favour High Tech Sector

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

11 July 2001

China is expected to replace its existing production-oriented VAT system with a dramatically different consumption-oriented model in order to better promote the development of its economy prior to its accession to the World Trade Organisation, it was revealed recently.

Dai Baihua, a senior official with the Ministry of Finance said this week that the new tax system was currently being reviewed by a number of related bodies, but that: 'the overall plan for the new system has already been mapped out and is ready to be put into practice.'

The new system, if implemented, would bring China into line with other WTO member countries, whose taxation systems have long been consumption oriented. It would single out the capital intensive and high tech enterprises for comparatively greater tax benefits than the country's more traditional labour intensive enterprises, in order to encourage development, and ensure that China is competitive on an international level. 'Foreign companies should feel at ease with China's new system if and when it is implemented,' said Dai.

However, there are fears that the new tax system may hurt the growth of China's booming labour intensive industries, as although there will reportedly be no increase in the absolute amount of taxes levied on the labour intensive sectors, the comparatively higher rebates to other sectors might put them at a disadvantage.

Another danger is that the extensive rebates after the implementation of the new regime could cause major tax losses which could pose a threat to the country's wider financial system. However Zhao Zhiyun, a tax expert with the China Academy of Social Sciences is confident that the new system will be a success if implemented carefully and monitored closely, and points out that the changes are bound to happen sooner or later, as WTO accession requires the implementation of a taxation system that complies with the trade organisation's rules. 'Chinese enterprises will gain time to build themselves up if the landmark reform is put into place as soon as possible,' said Zhao.

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