China's tax revenue will continue to grow at a higher rate over the
next few years.
In
2003, the country is expected to see a faster growth in private
investment, suggesting the internal growth mechanism has been
developing.
Foreign direct investment, which contributed a great deal to
China's gross domestic product (GDP) growth last year, will
experience a steady growth.
A
number of "hot consumption areas" such as housing, cars and
education will continue to have great effect on overall
consumption.
China's foreign trade, although suffering a deficit of US$1 billion
during the first quarter of 2003, will enjoy a surplus for the
whole year.
The Chinese economy is expected to grow by more than 7.5 per cent
in 2003.
Sound economic development, an improvement in companies' economic
efficiency and the end of tax favors enjoyed by some companies will
all lay a solid foundation for the country's tax revenue
growth.
The country will also step up the fight against tax evasion.
However, a number of other factors, such as a cut in the business
tax rate for financial and insurance companies and a cut in tariff
duties following China's accession to the World Trade Organization
will have negative effects on the tax revenue growth.
During the first quarter of this year, tax revenue rose 26.6 per
cent compared with the same period last year to 500.7 billion yuan
(US$60.3 billion).
The higher growth was a continuation of the faster revenue growth
witnessed in the second half of last year.
It
was also based on the relatively low figure for the same period
last year.
It
will be unrealistic to maintain the rate throughout the year.
When taking into account all positive and negative factors, the
country's tax revenue is likely to grow 13 per cent to 2 trillion
yuan (US$240 billion).
The contribution by the GDP growth to the tax revenue growth will
also increase.
The relationship between GDP growth and tax revenue growth will
become more harmonious.
In
a realistic situation, the rate of tax revenue growth should be 0.8
times or 1.2 times that of GDP growth.
The Chinese economy will continue to grow at a rapid pace in 2004
and 2005, the last two years of the country's 10th Five-Year Plan
(2001-05).
The guidelines and policies implemented in 2001 and 2002, which
tally with China's real situation, will continue.
The government will also take a series of new measures to fuel the
country's economic development.
China is expected to make greater progress in aspects such as
economic structural adjustment, financial mechanism reform and
"tax-for-fees" reform in rural areas during the two years.
Tax system
With an aim to achieve the goal set for the 10th Five-Year Plan,
China should devote greater attention to key issues in the
present's tax system.
The government should speed up tax system reforms, especially the
reform on key tax varieties such as enterprise income tax, personal
income tax and value-added tax.
The structural reform in tax system, which will reduce tax burdens
for some industries while increasing taxes on other industries,
will also make the primary distribution more rational and
effective.
The reform will have a great impact on the country's future
economic development.
Since China will continue to develop its economy, it has to speed
up technical upgrading of its traditional industries.
Value-added tax
The government should reform the value-added tax mechanism and map
out other tax favours to back the move.
China is now practicing a production-based value-added tax
system.
Under the system, fixed assets are classified as consumer goods and
are subject to the tax.
As
a result, enterprises may not claim tax deductions for the purchase
of fixed assets such as equipment and machinery.
The system places a heavy burden on enterprises wanting to increase
their fixed assets investment, especially for capital and
technology-intensive enterprises.
The system thus poses a hurdle to economic restructuring.
China may gradually phase in the consumption-based value-added tax
one sector at a time, starting with industries with heavier
value-added tax burdens like the high-tech and infrastructure
industries.
The conversion of the system could take place in two phases.
Initially, enterprises may be allowed to deduct the input
value-added tax for the current year's acquisition of machinery and
equipment. Later, enterprises may be allowed to deduct the input
value-added tax of purchased real properties.
Besides shifting to a consumption-based system, the value-added tax
system should be expanded to cover more activities currently
subject to business tax such as transportation and
telecommunications.
Enterprise income tax
Now that China is a World Trade Organization member, it is urgent
that the country should unify enterprise income tax policies.
The country is now practicing dual-track enterprise income tax
policies for domestic and foreign-funded companies.
The income tax rate for domestic companies was 33 per cent, while
that for foreign-funded companies stood at 17 per cent.
The country should implement the national treatment for domestic
and foreign-funded companies so that they could compete on an equal
footing.
Meanwhile, the government should lower the threshold for approving
small and medium-sized companies.
Income gap
In
recent years, the income gap between the rich and the poor in China
has come close to the international warning level.
With an aim to protect the interests of medium and low-income
people, the government should speed up reforms of the personal
income tax law.
Personal income tax has become a hot topic in recent years, because
the threshold for taxation which stands at 800 yuan (US$96) was
considered low and some rich people managed to avoid paying
taxes.
The present personal income tax rates vary in 11 categories based
on income sources - and this system does not have much control over
an individual's total annual income.
Additional incomes are not usually taxed, unless people declare it
themselves.
The system has many loopholes which tax evaders can take advantage
of.
The author is a senior researcher with the Taxation Research
Institute under the State Administration of Taxation.
(China Daily April 21, 2003)