China’s economic reform process is well underway after the central government announced a timeline for structural reforms to the tax system, increasing competition over a level playing field in the growing services sector, an Australian expert said.
From May 1, corporate income tax would be scrapped in favor of expanding the Value Added Tax (VAT) system to cover China’s growing services sector, Hans Hendrischke, University of Sydney Professor of Chinese Business and Management, told Xinhua.
It makes the financial industry more commercially minded, a crucial part of China’s economic reforms.
“It’s a milestone in the history of structural reforms,” said the expert, adding that it proves China’s comprehensive economic reforms are steadily ongoing.
Crucially however, the scrapping of corporate income tax changes the dynamic of provincial government funding to create a unified tax base, reducing the burden on enterprises to allow the service industry to grow.
Under the corporate income tax system, provincial governments were able to independently set their tax rates, creating a complex environment for enterprises to navigate.
“Once you take away the power from local governments to raise (or lower) corporate income tax... then you have a more open field for competition and you have an easier way for start-up entrepreneurs to move from location to location because they don’t depend on the support of a local government,” Hendrischke said.
Though fiscal revenue is set to drop in the near term, enhanced enterprise activity and increased entrepreneurial innovation will see revenue growth with the expanding services sector which is expected to contribute 60 percent of GDP by the end of the decade.
Importantly, unlike discussions of broadening or increasing Australia’s Goods and Services Tax (GST), VAT equivalent, the VAT expansion isn’t socially regressive.
“The argument and the objections against GST originally, and now against raising the GST, is largely that its socially regressive in that it places a higher burden on small consumers because everybody has to pay the same for those goods that are necessary,” Hendrischke said, adding that there is no social progression in that system.
“This system is one that works for corporations. It doesn’t have that (social regression) problem attached to it.”
Hendrischke argues cutting corporate income tax in favor of expanding the VAT may actually help Chinese society, solving social problems that exist because of large income differentials between regions.
“At the moment, the fiscal strength of the central government is quite strong, it’s the local governments who suffer underfunding,” Hendrischke said.
“If the transfer of this new VAT from central to local government works, then it would make difference. It would improve funding of local governments across the board because it’s a more evenly distributed system.”