China's tax cuts are or more than just a lip service?

With the tax cut in place, it goes against the grain to see the half-year fiscal revenue far outstripping the growth of China’s economy. A reasonable explanation might be the tax avoidance used to be rampant for SMEs has been much more difficult under the new tax code, or rather, relevant authority is doing its due diligence to carry out tax collection more seriously while the implementation of the tax cuts has been put on the backburner.

 

Photo: Reuters

Individual income tax cut is long overdue

When the third session of the Standing Committee of the 13th National People's Congress was closed, the draft amendment to the Individual Income Tax Law wasn’t submitted to the meeting for voting and will be subject to revision before another submission. The prospect of introducing the amendment this year has been seen slim or snuffed.

Once the amendments are adopted, the threshold for taxable income will be raised from 3,500 yuan to 5,000 yuan. Those earning a monthly wage from 5,000 yuan to 20,000 yuan will see their tax cut by over 50 percent and those earning a monthly wage from 20,000 to 80,000 will see their tax cut by 10 to 50 percent. Although there have been three tax cuts since 2006, the current threshold of 3500 yuan is far too low compared with average income level, rising living expenditures and has drawn widespread criticism for unfairly imposing heavy tax burdens on low income earners.

The issue of tax cut has been brought under the spotlight after China registered double-digit growth in its fiscal revenue, of which tax revenue in the first half of 2018 was up 14.4 per cent from the same period of last year a year to 9.16 trillion yuan. To break down, individual income tax accounted for 8.8% of China’s total tax revenue as against 36% for value-added tax and 26% for enterprise income tax respectively.

While the fiscal revenue is growing twice as fast as the GDP growth does, the retail sales in China has been mired in a slump – retail sales in May slowed to their lowest level in 15 years. With the 3 engines driving China's economy all slowing down, the government feels tremendous pressure to maintain economic growth and to create enough jobs and guarantee the party's legitimacy. That’s why for Beijing, a timely income tax cut is well justified for pushing consumption and pivoting its economy towards a strong domestic market amid trade tensions with the United States.

Through tax cuts, the government wants to ease the tax burden on Chinese households who are already feeling the pinch of rising mortgage bills and falling wages. The planned threshold for taxable income is still too low for disposal income to catch up with rising living cost. As China's fiscal revenue has been surging with reduced reliance on individual income tax accounting for a mere 8.8% of the total portfolio, the planned tax cut will not make a big dent in fiscal revenue while yielding great momentum for stimulating domestic demand.

Imminent corporate tax cut

Since the beginning of the year, the State Council’s executive meeting has issued 10 tax cut measures which are expected to cut corporate tax by more than 460 billion yuan throughout the year. Such intense effort, in Premier Li's words, is vital to improve the country’s competitiveness and protect entrepreneurship.

China’s high-level corporate tax rate has long been the subject of complaints among private entrepreneurs. As China loses its competitiveness in cheap labor, land supply and the ongoing trade tussle with the US, the current corporate tax rate has been weighing on or even suffocating companies and prompting them to relocate to other neighboring territories or even the US to take advantage of Trump’s preferential tax policies. As a result, domestic investment from the private sector, which accounts for about 60 per cent of China’s GDP, has been falling sharply in the past few years.

The Fujian based Fuyao Glass Industry Group has opened the world’s biggest assembly for automotive glass in Ohio, citing reasons such as high tax rate and miscellaneous fees charged by the Chinese government. Taiwan’s Foxconn Technology, the world’s largest contract manufacturer of consumer electronics, is setting up a US$10 billion assembly plant in Wisconsin to take advantage of the generous tax breaks in the American state.

China owes its reputation as the World's workshop to its manufacturing industries, which helped turn it into the World's second largest economy. As the growth rate of China's economy slows down, overcapacity, rising labor cost and land prices are squeezing profit margins of domestic and foreign manufacturers in China. If the costs for these companies can be greatly reduced, it will encourage them to stay here in China and propel the country's economic growth.

Undelivered tangible benefit

Despite the central government's tax cut plan, its positive effect on the bottom lines of enterprises has appeared minimal, because local authorities, strapped for revenues, seem to have imposed other fees such as greater levies for environmental protection. Zong Qinghou, founder of China’s soft drink maker Wahaha, recently told a forum that by his own estimates, the fees and taxes imposed on enterprises this year were greater than last year.

With the tax cut in place, it goes against the grain to look at the half-year fiscal revenue report, in which the corporate income tax increases by 13.5% striking stark contrast with slow growth in GDP, industrial production and profits. A reasonable explanation might be the tax avoidance used to be rampant for SMEs has been much more difficult under the new tax code, or rather, relevant authority is doing its due diligence to carry out tax collection more seriously while the implementation of the tax cuts has been put on the backburner.

If China wants to make substantial efforts in cutting tax to boost economy, direct tax code may offer a solution. Under the current tax code, tax will be levied once an enterprise starts operation, which is unfair for SMEs and start-ups, hindering private entrepreneurship. If a direct tax code is adopted, enterprises only need to pay taxes if they make profits. To make it happen, a modern tax information system shall be established, which of course pose an even greater challenge to tax authorities. 


Related Stories
Share this page
Touched Sympathetic Bored Angry Amused Sad Happy No comment

China's tax cuts are or more than just a lip service?China says US farmers may never regain market share lost in trade warChina paper blasts report about rifts in Beijing's leadership, says 'an elephant can't hide'Why US visas are a passport to uncertainty for China’s hi-tech researchersNew big role for trade war negotiator Liu He on tech panel as China bids to strengthen its handChina’s highly paid entertainers to face heavy taxes, says mediaShanghai rolls out 'controversial' policy to attract graduates from top two Chinese universitiesChina sets myopia control as new parameter for performance assessment of officialsCEOs buckle in for a bumpy ride as US-China trade war gains tractionChina-US trade war escalates as Beijing issues tariff list for US$16 billion worth of American goods
< Prev Next >