Analysis: Why China’s Tax Revenue Is Falling Even as GDP Jumps

China’s economy recorded a year-on-year GDP growth of 5.4% in the first quarter of 2024, which exceeded expectations. However, this robust economic expansion sharply contrasted with its fiscal situation, as total tax revenue fell by 3.5% during the same period, continuing a downward trend that began at the end of 2023. This divergence between GDP growth and declining tax income has raised questions about the sustainability and structure of China’s economic recovery [para. 1].

The Ministry of Finance (MOF) attributed this decline in tax revenue to several factors. Key reasons included continuing tax breaks introduced in 2022, such as deductions for R&D expenses, corporate income tax breaks for small businesses, and exemptions from value-added tax (VAT). Additionally, broader producer price declines put further pressure on fiscal income [para. 2].

A major contributor to the reduction in tax receipts was a significant rise in VAT refunds to businesses engaged in infrastructure investment. Local governments, under mounting pressure to underpin national GDP in a challenging international environment, have escalated infrastructure outlays. These investments often involve purchasing equipment, financed by both central government and local government special-purpose bonds [para. 3][para. 4].

China’s VAT system allows businesses to deduct input VAT (on raw materials and equipment) from VAT collected on sales (output VAT). Previously, excessive input VAT was carried forward to offset future liabilities. However, starting in 2018, and expanded in 2022, the government allowed companies to claim cash refunds for surplus input VAT under certain circumstances to alleviate cash flow pressures. This policy expansion resulted in greater VAT refunds, especially for infrastructure projects, which typically take years to generate taxable revenue, leading to a delay in corresponding tax receipts and adding immediate downward pressure on tax revenue [para. 5][para. 6].

The expectation in 2022 was that these VAT refunds would be offset by higher future tax revenues once companies’ projects were completed and began generating income. Unfortunately, some beneficiary companies have gone bankrupt or deregistered, and sluggish economic growth further suppressed VAT returns. As a result, the anticipated rebound in VAT income has not fully occurred [para. 7].

Tax revenue historically contributes about 80% to the government’s general public budget (GPB)—the primary fiscal account in China’s system. In 2023, total tax revenue fell 3.4% to 17.5 trillion yuan (approximately $2.4 trillion), and in the first quarter of 2024, it dropped another 3.5% to about 4.7 trillion yuan. Corporate income tax, accounting for 23% of total tax receipts, led the declines with a 6.8% year-on-year fall. Meanwhile, VAT, consumption tax, and personal income tax saw minor increases of 2.1%, 2.2%, and 7.1%, respectively [para. 8][para. 9].

The discrepancy between GDP growth and shrinking tax revenue extends beyond tax breaks and refund policies; it also arises from differences in how GDP and fiscal revenue are measured. The National Bureau of Statistics calculates GDP at “real” (inflation-adjusted) prices, while the MOF reports current, nominal figures. Since the second quarter of 2023, China’s GDP deflator and producer price index have been negative, indicating deflation, which erodes nominal tax revenue even if real GDP rises [para. 10][para. 11][para. 12].

Even after adjusting for inflation, nominal GDP still grew by 4.6% in the first quarter of 2025, while tax revenue fell by 3.5%. This disconnection is not unprecedented; in 2018, for instance, tax revenues sometimes outpaced GDP growth due to changes in the tax system and improved collection [para. 13][para. 14].