China is expected to end its decades-long use of a production-oriented value-added tax system soon and institute a dramatically different new consumption-oriented tax system to better promote the well-structured development of its economy.
"The overall plan for the new system has already been mapped out and is ready to be put into practice," said Dai Baihua, a senior official with the Ministry of Finance.
According to Dai and other tax experts, the core difference between the two system rests in the fact that the new system would give more tax rebates to enterprises' investment in fixed assets.
Deduction of the value-added taxes in buying production equipment is one area that will be affected by the change. At present, the value-added tax rate stands at 17 per cent and an enterprise has to pay such tax in buying raw materials and production equipment or selling products. The new system would single out the capital-intensive sectors and the high-tech enterprises for comparatively greater tax benefits than labour-intensive industries, which usually require less investment in fixed assets than other industries, said Zhao Zhiyun, a tax expert with the China Academy of Social Sciences.
"The move should also be very good for the country's efforts to build up a well-structured economy that should see sustainable and healthy growth in the coming decades," said Dai.
He said the new tax system would mainly bring more tax benefits to the group of enterprises that China is trying to develop in the coming decades in the process of restructuring its economy from the traditional sectors to a modern business structure with more competitive power in the world market.
"The development of China's high-tech industry, which usually demands heavier investment but takes a longer time to bring in returns, obviously should benefit," said Zhao, citing that the move would run parallel with the country's aim of building up its high-tech industries.
The new system should also help enterprises lessen their financial burdens while gearing up to face international competition, which is sure to come with China's accession into the World Trade Organization (WTO), said Zhao.
Dai revealed that the planned new value-added tax system is currently being reviewed by a number of related authorities before being given a final go-ahead.
China levies a 17 per cent production-based value-added tax on enterprises regardless of business sector, but some business sectors, such as the software industry, could get some extra rebates and sometimes under-the-table tax rebates are also garnered by some other business sectors.
"The new system should make the tax rebates more transparent and fairer to all enterprises," said Zhao.
Another benefit of the new system is that it will bring China's tax system in line with the systems of WTO member countries, as the consumption-oriented system has long been the common practice in other countries, according to Zhao.
"Foreign company should feel at ease with China's new system if and when it is implemented," said Zhao.
By no means blindly optimistic, Dai also has his worries about the implementation of the system, saying that there is a possibility that the new system may hurt the growth of China's booming labour-intensive industries, as it seems that the new system will levy comparatively more taxes on such sectors.
"There will definitely not be any increase in the absolute amount of tax levied on the labour-intensive sectors, but the rebates to some sectors might make it seem like they face a comparative surge," said Dai.
Even more discouraging is the fact that the move could further widen the gap between the coastal areas and the western hinterland areas, which will host comparatively more labour-intensive industries in the future.
Another danger with the launch of the new system, said Dai, is that there could be billions of yuan in tax losses after the launch of the new system because of extensive tax rebates in sectors with major fixed asset investment, which could pose threats to the country's financial system and need cautious treatment.
But Zhao seems optimistic nonetheless, citing that the move has to be made sooner or later, as China's WTO accession will require the country to implement a tax system that complies with WTO rules.
"Chinese enterprises will gain time to build themselves up if the landmark reform is put into practice as soon as possible," said Zhao.
(Business Weekly 07/10/2001)
