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VAT Reform Experiment Advised

Ni Hongri, a senior researcher at the State Council's Development Research Center, said the current macroeconomic situation should not be an obstacle to the timely implementation of the value-added tax (VAT) system reform despite the current high levels of fixed asset investment.

The government had originally planned to carry out the reform on a trial basis beginning April 1. It was to be applied to eight industries, including oil, chemicals, auto manufacturing and metallurgy, in the old northeast China industrial base. The plan was postponed owing to a fast rise in fixed asset investment during the first quarter.

The central government felt that implementation of the tax reform plan would fuel additional investment, a significant problem at this time for national economic development. Excessive growth in some sectors and regions is putting a strain on transportation and power supplies, and driving up the price of raw materials.

"The tax reform plan, which is aimed at attracting companies to invest in the provinces of Jilin, Liaoning and Heilongjiang, will reduce companies' tax burdens," Ni said.

China currently uses a production-based VAT system in which fixed assets are classified as consumer goods and are subject to tax. As a result, enterprises cannot claim tax deductions for the purchase of fixed assets such as plant and equipment.

The system places a heavy burden on enterprises wanting to build their fixed assets, especially for capital- and technology-intensive enterprises. The system thus poses a hurdle to economic restructuring.

Experts have suggested the government replace the present system with a consumption-based one, which allows companies to deduct certain expenses when buying new plant and equipment.

Xie Xuren, director of the State Administration of Taxation, said at the end of last year the government would implement a consumption-based VAT system in the eight selected industries in northwest China this year. Based on the experiences gained from the experiment, the government would later implement the system across the country, he said.

Ni said the tax reform plan was an important measure taken by the central government to revive the old industrial base.

"More investment encouraged by the new tax plan is helpful for companies' systemic reforms in the three provinces," she said. "The government should implement the plan in a timely manner."

Ni added that the government could take other steps to cool fixed-asset investment. For example, it could resume levying an adjustment tax on fixed-asset investment in industries that are considered overheated.

Zhao Zhiyun, a senior economist with the Chinese Academy of Social Sciences, believes the government will not postpone the new tax plan for long.

"It would rather use monetary measures than fiscal and tax measures to adjust the current economic development," she said.

Since the second half of last year, the central government has taken several steps to prevent fixed asset investment from growing too much. These include raising the bank reserve requirement, tightening loans to the steel, aluminum and cement industries, and beefing up management over development zones.

Those measures will have a great impact on fixed asset investment this year, according to Zhang Liqun, a senior researcher with the Development Research Center.

"The country's fast increase in fixed asset investment will come down in the remainder of the year," he said, adding that a slowdown in fixed asset investment should retard the country's economic growth this year.

Zhang forecasts GDP will grow 9 percent this year.

(China Daily April 23, 2004)

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