Business     

Shanghai spearheads tax cut program

China.org.cn, October 27, 2011

• China will roll out a tax pilot grogram in Shanghai to replace business tax with a value-added tax, the State Council, or China's Cabinet, said in a statement on Wednesday.

  The move, considered to reduce the tax burden on transportation and some service companies in Shanghai, will have their business tax replaced a by value-added tax, a majority of which is deductible, starting January 1, the statement said.

  If the pilot program is successful and when the conditions permit, the program will be extended to some service businesses nationwide, it said.

  The country will also introduce two lower-rate VAT categories as part of the tax reform, it said.

  The two new VAT rates will be 11 percent and 6 percent in addition to the existing VAT brackets of 17 percent and 13 percent, according to a report by Shanghai Daily.

  Currently, the VAT applies only to enterprises or individuals who sell merchandise, provide processing, repair or assembly service, or import goods within China.

  Unlike the business tax, which is charged on a company's revenue regardless of its costs, VAT can have such costs as fuel and equipment expenses deducted.

  A large number of service enterprises now operating on high costs do not enjoy the benefits of VAT.

  "Companies especially in the logistics sector will surely benefit from the measure as it reduces their growing costs on operation," said Walter Tong, a tax partner with Ernst & Young. "Their spending on purchasing can be deducted thereafter."

  China's inflation was running at above 6 percent for four consecutive months, official data showed, and the gasoline price has been rising in the past 16 months from 7,190 yuan a ton to 8,280 yuan a ton.

  "Chinese companies' tax burden are excessively heavy in recent years, and the tax-cut policies are released just in time," said Lu Zhengwei, chief economist with the Industrial Bank, in an interview with Shanghai Daily. "But it's more important to have the policies solidly implemented."

  Economists saw the measure as part of a selective easing of macroeconomic policies to help smaller firms that are suffering under tight monetary conditions.

  It is also taken as the start of nationwide structural tax cuts to improve China's economic structure, a target highlighted in the country's strategic 12th Five-Year-Plan starting this year.

  "The VAT reform is aimed at avoiding repeated tax collection and supporting the growth of the advanced service industry," the State Council said in the statement.

  Premier Wen Jiabao said on Tuesday that China should take measures such as "structural tax cuts" to promote stable growth. He stressed that start-up companies involved in innovation should enjoy tax cuts.

  The central government earlier this month promised to have state-owned banks lend more to small companies that have turned to high-interest unlicensed lenders after regulators tightened access to credit.

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