Caixin
Jan 22, 2021 04:25 AM
ECONOMY

China Should Focus on Policy Certainty and Risk Hedging, Think Tank Says

Tax collectors review factory orders at an electric power equipment manufacturer in Jiangsu province.
Tax collectors review factory orders at an electric power equipment manufacturer in Jiangsu province.

China has limited room to further cut taxes and reduce fees, and now it’s more important to inject certainty and hedge risks than to reduce tax burdens on enterprises, a state-run think tank said.

A survey conducted by the Chinese Academy of Fiscal Sciences, a think tank under the Finance Ministry, showed that tax and fee reductions since 2016 have achieved remarkable results. Enterprises’ costs for taxes and fees, financing, energy, land and logistics have all decreased, and the business environment continues to improve, according to a report on the survey.

However, even after the tax and fee reductions, companies still feel an implicit burden related to public risks, said Liu Shangxi, head of the Chinese Academy of Fiscal Sciences.

For example, in the Covid-19 pandemic, businesses need to take prevention and control measures to resume production, which are translated into operating and management costs, Liu said. Social distancing measures in the pandemic have affected the flow of people and logistics, which in turn have increased transaction costs for enterprises, he said.

“These risks can be converted into real costs,” Liu said. “In the current situation, to reduce the burden on enterprises, the most important thing is to inject certainty, lower the level of public risk, and let enterprises have stable expectations for operation, investment and research and development.”

The report suggests that the government maintain stability of policy, supervision and reform, guide enterprises to innovate and enhance their ability to hedge risks, and push through reforms in market-based allocation of land, labor, capital, data and other factors of production to improve businesses’ capability to absorb the necessary costs.

From 2017–19, the average ratio of total corporate tax payments to operating revenue was 4.78% and showed a clear trend of decline. The average ratio of total corporate tax to profit was 11.15%, significantly lower than the standard corporate tax rate of 25%, the report showed.

The share of tax payments by enterprises for every 100 yuan ($15.50) of business income has consistently dropped during the past five years, but the rate of decline has flattened recently. As the ratio of corporate tax to enterprises’ total costs is not high, further room for tax and fee cuts is very limited, the report found.

In addition to corporate income taxes, Chinese enterprises are also subject to a value-added tax (VAT). The government started overhauling VAT rates in 2018, and in 2019 reduced the rate to 13% for taxpayers that previously paid 16% and to 9% for those subject to a 10% levy. In 2019, the government lowered companies’ rate for pension contributions to 16% of payrolls from the previous maximum of 20% as part of a pledge to cut taxes and fees by nearly 2 trillion yuan to boost the economy.

The report also pointed out that some of the costs, including labor, raw materials and other elements are still on the rise. The average salary of the surveyed enterprises increased from 61,400 yuan in 2017 to 71,100 yuan in 2019, with an average annual growth rate of 7.54%.

High legal costs, financing difficulties and high cost of financing are among prominent problems reflected by enterprises in the survey.

Contact reporter Denise Jia (huijuanjia@caixin.com) and editor Bob Simison (bobsimison@caixin.com).

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