Jul 18, 2017 01:39 PM

Editorial: Reducing Nontax Business Charges Vital to Spurring Growth

By Hu Shuli

The Chinese government in recent months has stepped up efforts to trim nontax charges such as trademark registration fees in a bid to reduce business costs. The move comes as the country shifts from a system that relies on business taxes to value-added taxes. In its latest attempt in June, the Ministry of Finance published on its official website for public scrutiny all central and local government fees imposed on businesses.

Making all government levies public is an effective way to prevent local governments from charging “exorbitant fees” and to improve transparency. But more needs to be done to substantially reduce business costs. Premier Li Keqiang recently noted in a meeting with experts and company leaders that a wide range of government charges have “excessively increased” transaction costs for those doing business in China.

Over the past few years, authorities have continued to reduce the tax burden on businesses and slash other administrative fees on them. This includes charges to quarantine cross-border goods or register a new venture. Since 2013, the central government trimmed the number of nontax levies on businesses from 185 to 51, a 72% drop. Provincial governments have also reduced the number and value of nontax charges in recent years. These measures are expected to save over 1 trillion yuan ($148 billion) in tax and nontax expenses for businesses this year alone. Nearly 60% of this saving is expected to come from cutting administrative fees.

Despite these efforts, contributions to government coffers from nontax levies continue to rise while tax revenues dwindle. Official data showed that from 2010 to 2016, income from nontax charges increased from 12% to 18.3%. This is partly because local governments continued to slap arbitrary fees on businesses to collect money for their respective urban infrastructure construction funds or local education development funds. Local authorities were tempted to push up administrative charges to offset a decline in tax revenue amid the economic slowdown. But business owners have complained that these charges are being introduced in a discretionary and opaque manner. Scrapping some of these excessive and even unnecessary fees to spur growth is undoubtedly a tough task, especially at a time when fiscal revenue growth is slowing.

Opaque administrative levies have long been a headache for companies because they varied from province to province and were loosely regulated. For example, some government departments required companies to hire “designated intermediaries” such as business consultants or quality assessors — all paid-for services — as a prerequisite to apply for certain government approvals. Such practices push up business costs and create room for some semi-government organizations such as quality assessment labs to use their government ties to profit by offering “mandatory” intermediary services. The central government has required all levels of government to publish by the end of the year the prices charged for such administrative services to assess whether there are any “improper” charges.

Arbitrary government levies also reflect the level of state intervention in business operations. It also highlights the urgent need to reform public institutions and the country’s fiscal and tax systems.

Cutting administrative fees is tougher than slashing taxes because some of them help keep certain public departments afloat. They could also burn serious holes in the budgets of local governments. There is added pressure because some local governments have seen their tax incomes dwindle as the country shifts from a business tax system to a value-added tax model.

The ongoing tax reforms have changed the distribution of tax revenues between the central and local governments. But institutional arrangements needed to enforce these changes, which includes new local tax systems to generate alternative revenues, haven’t been put in place yet. This has made some local governments more reluctant to respond to a call by central authorities to trim unnecessary administrative charges.

The best way to cut excessive government charges is to define a clear boundary between administrative power and market activities. A standard and transparent pricing system should be set up for essential charges such as those aimed at supporting public services and industrial development. At the same time, levies deemed “improper” should be scratched. Local governments should also find stable revenue sources through further fiscal reform.

Efforts to streamline public institutions and adjust relations between the central and local governments could help reduce state spending. This could also help ensure that local authorities don’t overspend. It is also important to set up an effective supervisory system to improve transparency on government spending and to protect companies’ rights. Such a system of oversight would involve both government agencies and the public. These changes will stem from deeper reforms to enhance the rule of law and good governance.

Visionary policy setting and institutional arrangements will help weed out “excessive” administrative charges and reduce business costs. It is a crucial step to strengthen China’s global competitiveness and help businesses overcome any challenges brought about by the country’s ongoing economic transformation.

Hu Shuli is the editor-in-chief of Caixin Media.

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