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China Low Tax Policy Lifts Economy

by S. Jack Heffernan Ph.D
China low tax policy

China’s fiscal revenue and tax revenue were both on the mend after months-long decline, a sign of pro-growth policies taking hold.

The country’s fiscal revenue grew 5.6 percent year on year in August after a slipping streak that started in April, while tax revenue edged up 0.6 percent, the first increase since March, official data showed.

The upturn in fiscal revenue is a result of economic recovery, Li Chao, chief economist of Zheshang Securities, was quoted as saying in an interview.

In addition to policy-backed growth, analysts also cited the completion of a large-scale value-added tax (VAT) credit refund, reducing the burden on tax revenue.

The country launched the large-scale VAT credit refund campaign in April to ease the financial burden on taxpayers. From the beginning of this year to Sept. 20, the country had refunded 2.2 trillion yuan (about 309.9 billion U.S. dollars) of VAT credit and approved deferred payments on 632.6 billion yuan of taxes and fees, according to the State Taxation Administration.

Market entities have been among the major beneficiaries of the tax relief. Taxation data showed that sales revenue of companies across China rose 5.2 percent in August from a year ago, up 2.1 percentage points from July.

In the first eight months of the year, tax revenue totaled some 11.32 trillion yuan, down 12.6 percent year on year, data from the Ministry of Finance showed. Excluding the impact of the VAT credit refunds, revenue grew 1.1 percent from a year earlier.

Domestic consumption tax increased 8.7 percent from the same period last year, while revenues from personal income tax and corporate tax climbed 8.9 percent and 2.5 percent respectively.

The purchase tax on automobiles dropped 30.5 percent year on year in the first eight months, as the government decided in late May to halve the car purchase tax for certain passenger vehicles. The move has led to tax reduction totaling over 23 billion yuan from June to August, which analysts say has helped spur consumption.

Export tax rebates increased by 207.8 billion yuan, or 18.2 percent, to 1.35 trillion yuan in the Jan.-Aug. period over last year. It has helped bolster foreign trade growth, according to Xie Wen, an official with the administration.

For the rest of the year, extended policies to support market entities including tax payment deferrals and VAT credit refunds could weigh on tax revenue, according to analysts.

The country has allowed micro, small and medium-sized enterprises and self-employed households in the manufacturing sector to defer the payment of certain taxes and fees worth around 440 billion yuan till the end of the year.

The manufacturing sector is expected to receive another 32 billion yuan of VAT credit refund in the last four months of this year.

To underpin economic fundamentals in the fourth quarter, China has pledged more efforts, including making full use of the policy-backed and development-oriented financial instruments to expedite infrastructure construction.

“These instruments, along with some 500 billion yuan of unused special bonds to be issued by the end of this month, will propel growth in the near future without putting extra squeeze on fiscal spending,” said Zhao Wei, chief economist with Sinolink Securities.

China’s fiscal spending in the first eight months rose 6.3 percent year on year to 16.5 trillion yuan, official data showed.

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