The government should reduce tax burdens for domestic financial and
insurance companies to increase their competitiveness, according to
economic experts.
For many years, the financial sector has been considered a
high-profit service industry. The government currently levies 11
varieties of taxes, including a business tax and an enterprise
income tax on these ventures.
The government imposed a 5 percent business tax and a 55 percent
income tax on financial and insurance companies in 1994 when the
country implemented a new taxation system.
In
1997, the business tax rate was adjusted to 8 percent, as the
income tax rate dropped to 33 percent.
While aiming to support the reform of the financial and insurance
industries, the government decided to cut the business tax rate
from 8 percent to 5 percent within the ensuing three years until
2003.
In
2001, tax income generated from financial and insurance companies
reached 77 billion yuan (US$9.3 billion), accounting for more than
5 percent of the country's total tax revenue.
"China's financial and insurance companies bear too much of the tax
burden, compared with their competitors in other countries," said
Zhang Peisen, a senior researcher with the Taxation Research
Institute.
In
certain other countries, governments usually do not levy a business
tax. In addition, financial companies can be exempted from
value-added taxes.
In
China, the government should start by unifying the enterprise
income tax system, Zhang said. China is now enforcing two-pronged
enterprise income tax policies for domestic and foreign-funded
companies.
The income tax rate for domestic companies is 33 percent, while
that for foreign-backed companies is 17 percent.
Also, the government should further cut the business tax rate for
financial and insurance companies to no more than 3 percent in the
future, said Xia Jiechang, a senior economist with the Chinese
Academy of Social Sciences.
Experts have estimated that cuts to the business tax rate by 1
percentage point could help financial and insurance companies save
6 billion yuan (US$722 million).
This would surely help these companies increase profits while
becoming more competitive, said Xu Zhendong, a researcher with the
International Finance Research Institute.
The state-owned commercial banks would be the biggest beneficiaries
of the tax rate cut, since business income accounted for a
significant portion of the banks' total income, he said.
In
case the government is unable to increase input into banks, the cut
of business tax rates could help increase their capital adequacy,
he said.
The country's commercial bank law stipulates that the capital
adequacy ratio needs to be at least 8 percent, the minimum figure
required by the Basel agreement forged by international banking
managers.
(China Daily June 24, 2003)