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Tax System Reform on Sound Track

China's macro-economic situation, which features fast fixed asset investment growth and higher consumer prices, will not have a big impact on the central government's plan to push forward with tax system reform.

Zhang Peisen, a senior researcher with the State Administration of Taxation's Taxation Research Institute, said tax system reform will continue, even though the plan helps reduce taxpayers' burden and adds fuel to the economy.

"The overall situation of China's economy is fine," Zhang said.

Overheating is only found in some industries, such as automotive, steel and cement, he said, and this is temporary.

A series of macro-control measures taken by the government have begun to take effect, Zhang said.

Economic data released so far for May shows factory output and money supply rising at the slowest annual pace in months.

Ni Hongri, a senior researcher with the State Council's Development Research Center, agreed and said overheating in selected industries should not be an obstacle to the reform plan.

"The government should first carry out the value-added tax system reform experiment in Northeast China," she said.

The tax plan aims to attract companies to invest in Jilin, Liaoning and Heilongjiang provinces to revive the old industrial bases, she said.

China currently has a production-based value-added tax system.

Under the system, fixed assets are classified as consumer goods and are subject to the tax.

Companies could 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 government has decided to adopt a consumption-based system instead, which allows companies to deduct such tax when importing new machinery and equipment.

Director Xie Xuren of the State Administration of Taxation said late last year the government would implement a consumption-based value-added tax system in eight industries in Northeast China from this year.

Based on the experience gained from the experiment, the government will implement the system across the country at a later date.

"The government should carry out the reform as early as possible," Ni said.

According to Zhang, the value-added tax reform plan is expected to be carried out some time later this year.

The government should also make full preparations for enterprise income tax and personal income tax reforms.

Since China has become a member of the World Trade Organization, the country should unify enterprise income tax policies, Zhang said.

The country is now practicing dual-track enterprise income tax policies for domestic and foreign-funded companies.

The income tax rate for domestic companies is 33 percent, while that for foreign-funded companies stands at 17 percent.

"The country should implement national treatment for domestic and foreign-funded companies, because they should compete on an equal footing," Zhang said.

In recent years, personal income tax has become a hot topic. The threshold for taxation is 800 yuan (US$96), which is considered rather low.

Personal income tax rates vary across 11 categories based on income sources, and the system has little control over an individual's total annual income.

Taxation is aimed at people with high-level incomes to promote economic development and social stability.

As a result, the current 800-yuan (US$96) starting point for taxation on monthly income needs to be raised, Zhang said.

Personal income tax should also be based on the combination of various means of income, including bonuses and dividends, instead of merely salaries, he said.

The personal circumstances of an individual, such as whether or not they are supporting children and the elderly, should also be considered before tax is calculated.

(China Daily June 18, 2004)

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