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China's current taxation system was only initiated in 1994. But following the nation's accession to the World Trade Organization (WTO) and the gradual establishment of its market economic system, the system has revealed many problems which demand urgent reform.
Forthcoming reforms should standardize the system and make it more equitable. The majority of people should benefit by enjoying lesser tax burdens. Meanwhile, the reforms should further expand the tax base and strengthen tax collection to increase tax revenues.
The reforms mainly concern turnover tax, income tax and property tax.
Turnover tax refers to taxes levied on turnovers of commodities in circulation. It mainly includes value-added tax, consumption tax, business tax and tariff, which altogether account for more than 60 percent of the country's tax revenues.
Reform in the turnover tax should start with value-added tax (VAT) reform. The VAT is the largest contributor to the tax revenue, accounting for more than one-third of the total tax collection. The primary task of the reform is to transform the current production-oriented VAT into consumption-oriented one.
China is now practicing a production-based VAT system. Under such an arrangement, fixed assets bought by producers for production are subject to VAT. Enterprises cannot claim tax deduction for purchase of fixed assets such as equipment and machinery.
Such fixed assets are taken as consumer goods and free from VAT in a consumption-based VAT regime, which is practiced in about 90 percent of the world economies.
China's current VAT system places a heavy burden on enterprises which seek to increase their fixed assets investment and has posed a hurdle to their technological advancement.
The adoption of a consumption-based VAT system will encourage enterprises to expand investment and improve their technological level.
The key to the change in the VAT mode is the country's financial affordability. If the change comes about, enterprises will enjoy lesser tax burdens and the country's tax revenue will probably decrease, because the tax base under the consumption-based VAT system will narrow down compared with the production-based mode while the tax rate remains the same.
Based on 2003 figures, the gap could reach 60-80 billion yuan (US$7.2-9.6 billion) after the reform is carried out.
It is affordable. While the country will suffer from less revenues, expanded business activities and increased corporate income will hopefully make up for part of the gap.
Properly setting the level of tax burden is another task in the VAT reform.
People are divided on whether the current level of the tax burden of VAT is appropriate. In my opinion, it is necessary to reduce the tax rate of the turnover tax, especially the VAT.
Regarding consumption tax, the scope of the current tax collection is too narrow to fully bring out its role of income distribution adjustment. It should be widened to include products whose production consumes great amounts of resources and contaminates the environment and high-grade expensive commodities, such as luxurious furs.
On the other hand, the tax rate of some daily commodities, such as hair care articles, should be gradually lowered and ultimately eliminated when the time is ripe.
Tariff reform should be oriented towards cutting tariff levels to reduce the general level of tariff to cater to China's WTO commitments. The structure of tariffs on different products should be adjusted to encourage competition.
Income tax reform should focus on unifying the income tax systems of foreign and domestic enterprises and reforming its collection mode.
China established a unified income tax for foreign and domestic enterprises in 1991 and 1994 respectively, but it has yet to unify the two tracks of income tax, which favor foreign enterprises and has jeopardized the principle of fair competition.
The scope and standards for itemization such as costs, which will be deducted from the taxable income, should be made clear and methods for calculating taxable income should be unified.
To unify the tax rate, that for domestic firms should be lowered to be in line with the international trend and China's concrete situation. A 25 percent rate can be considered and small and medium-sized enterprises with an annual income of less than 100,000 yuan (US$12,050) should enjoy a 18 percent tax rate.
Many local governments and departments have issued preferential tax policies, especially for foreign-funded enterprises, which distorts the order of tax collection. The principle of national treatment, which means putting local and foreign enterprises on equal footing, should be respected.
Personal income tax collection also needs to be regulated. The number of tax deductions and exemptions should be limited within a certain level and reduction and exemption should go through strict procedures.
A focus of attention concerning the personal income tax reform is the adjustment of the starting point for the collection of the tax. Currently, that part of above 800 yuan (US$96) is taxed. It is a unified line across the country.
Given China's geographical vastness and unbalanced economic scenarios, a single line cannot fit the varied situation. The best solution would be setting differential standards for different regions. If this cannot be achieved at the current stage, a range of 800-1,600 yuan (US$96-193) should be established as a reference for different regions to set their own level in accordance with their situation.
This will not only promote the authority of the taxation law, but also make collection more acceptable for the people.
Regarding property tax, the Third Plenum of the 16th Communist Party of China Central Committee, which was held last October, made a decision that a unified property tax will be levied when the time is ripe while eradicating various related fees.
In the tax reform, the various taxes and fees concerning real estate transactions will be streamlined into the property tax. This will cut willful fee collection and reduce people's financial burden.
Given the number of preparations to be completed, however, the property tax will not be started in the near future.
(China Daily April 19, 2004)
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