China is likely to increase its tax rebate quota by between 20 billion yuan and 30 billion yuan (US$2.4 billion to US$3.6 billion) this year to encourage exports, experts said. A Ministry of Finance official said the ministry is working on a plan to increase the quota for this year.

The State Council must later approve the plan before it is put into practice, the official said.

Niu Li, a senior economist with the State Information Centre, said: "This is a piece of good news for export companies, which have been facing increasing difficulties since the SARS outbreak.''

The country's tax rebate quota for this year is about 129 billion yuan (US$15.5 billion), which would be about 100 billion yuan (US$12 billion) less than the real demand if exports grow by only 10 per cent, he said.

Ni Hongri, a senior research fellow with the State Council's Development Research Centre, said the current fiscal situation made it possible for the country to increase the rebate quota by 20 billion to 30 billion yuan (US$2.4 billion to US$3.6 billion).

The fiscal situation for the first four months of this year has been surprisingly good, featuring the highest revenue growth and lowest increase in expenditure since 1998, Ni said.

By the end of April, the increased fiscal revenue reached 167.5 billion yuan (US$20.2 billion), well above the 158.7 billion yuan (US$19.1 billion) in increased revenue that the budget set aside for this year.

Tax rebates are common practice in international trade. The government usually returns value-added tax and consumption tax to export companies that sell products abroad to increase these companies' competitiveness.

But the Chinese Government has failed to pay the rebate promptly to export companies during the past several years because the country's fast growing foreign-trade business brought about demand for more tax rebates than the quota set at the beginning of each year.

Reliable sources said that, by the end of last year, the delayed payment of tax rebates reached more than 247 billion yuan (US$29.8 billion).

Tax refunds for last year and this year went largely unpaid to export companies in several major provinces and municipalities.

For some companies, tax rebates accounted for 70 to 80 per cent of their profits, Niu said.

"The delayed payments have created enormous difficulties for companies' business activities and are harmful to exports,'' he said.

Long Guoqiang, another research fellow with the Development Research Centre, said the delayed payment of tax rebates has become a problem of hidden debt in China's finance industry.

Some foreign-trade companies suffer from a lack of floating capital because of the delay in tax rebate payments. To deal with this, the relevant government departments have agreed that these companies can borrow from banks by showing their refund certificates.

The loans borrowed via this method account for a large proportion of the total in some areas, such as Ningbo in East China's Zhejiang Province, Long said.

Some foreign companies have become increasingly reliant on this kind of loans because of the fast-growing export trade and the slow payment of tax rebates.

"This will have a negative impact on commercial banks' business and possibly increase these banks' non-performing loans,'' he said.

(China Daily June 17, 2003)