Tax Reduction: Ease the Burden
Extending the Coverage
Since 2009, extending the coverage of VAT deduction has been a priority measure for China. Before 2009, taxpayers could only deduct the input VAT they paid for raw materials and transportation, but not for fixed assets such as production equipment and machinery. After 2009, VAT paid on fixed assets could be deducted, but consumption taxes they paid on cars, motorcycles and barges still could not be taken off from the total tax payable. On August 1 this year things changed: such consumption taxes can offset the amount of VAT an enterprise has to pay.
Wang Dongsheng, vice president of Zhonghui Certified Tax Agents Co., Ltd., believes that the expansion of the deduction policy to motorcycles, cars and barges has, on one hand, reduced tax burden on the enterprises, and on the other, boosted the relevant industries.
Mr. Song is general manager of Beijing Shuihai Technology Development Company. A few years ago, his company wanted to buy more cars to meet the needs of his expanding business, but he hesitated to do so because of the double tax policy. In August, his company purchased three cars worth over RMB 1 million. He estimated the company’s tax bill for August and September at around RMB 300,000, but when the consumption tax on the three cars is deducted, the amount of tax he actually has to pay is only RMB 130,000.
Tax Exemption for Small Enterprises with Thin Profits
Small enterprises have suffered increasing pressure in the face of the current economic slowdown. Most of them are in the service sector and generate thin profits. In the past, business tax and VAT were levied based on sales and operating revenue; therefore, taxation on all enterprises was the same and gave no consideration to whether their profit was high or low, or even whether they made a profit or a loss. In that way, many small enterprises normally earned relatively little but paid a lot.
Since August 1, companies with monthly sales of less than RMB 20,000 are exempt from paying VAT and business tax. According to the Ministry of Finance and the SAT, an estimated six million taxpayers in the country no longer need to pay VAT and business tax.
Professor Hu Yi from the School of Public Economics and Administration of Shanghai University of Finance and Economics expounded the benefits of tax exemption. Take a small enterprise with monthly sales revenue at RMB 20,000 as an example. After the tax exemption, the company saves RMB 600 (RMB 20,000x3%) in tax payment every month, or RMB 7,200 every year. Generally speaking, small enterprises feature thin profits. If the profit rate is 10 percent, the profit of a RMB 20,000 enterprise is RMB 2,000. Even if the profit rate is 20 percent, the profits are merely RMB 4,000. Therefore, a RMB 600 tax exemption every month can be significant.
Liu Shangxi, deputy director of the Research Institute for Fiscal Science of the Ministry of Finance, pointed out that the number of small enterprises is huge; therefore, the coverage of tax exemption is wide. If a small enterprise has 10 employees on average, the policy will affect about 60 million people nationwide. The policy also lowers the tax threshold for new entrepreneurs. Newly established companies create more job opportunities, which in turn raise people’s income and inject vitality into social and economic development.
The sluggish economy has brought difficulties for enterprises and thus affected the government’s fiscal revenue. Some experts are worried that the continuing structural tax reduction policy will further affect China’s fiscal revenue. Even so, policy makers should take measures to raise the efficiency of current fiscal expenditure and insist on tax reduction policies for the development of real economies.
ZOU GUOJIN is a journalist with China Tax News.
