Tax Dilemma for China's Ministry of Finance

News, page 3 issue no. 377 July 21 2008
Translated by Liu Peng
Original article: [Chinese]

Corporate income tax is likely to be targeted as a major source to boost China's state coffer as its Ministry of Finance faces increasing fiscal spending pressure from natural disasters and global price surges of resources.

The EO has learned that taxation departments had been ordered to enhance corporate income tax management and curb tax evasion.

The directive came at a time when the cries for tax cuts had grown as small and medium enterprises were hard pressed by tight macro-control policy since late last year, and they were calling for preferential policies to pull through the difficult time.

Despite the outcry, an official from Ministry of Finance said it was not the right time to introduce preferential tax policies, as the Ministry was contemplating how to increase tax revenue to meet rising fiscal spending for the coming years.

High-profile Taxation Meeting
On July 10, a working conference on corporate income tax and tax-evasion was held in Nanjing. It was attended by high officials including Chinese Vice Premier Li Keqiang, all the chiefs of State Administration of Taxation, directors of local taxation departments, and even retired veteran cadres.

One official who was at the meeting told the EO that corporate income tax, which has a new law effective early this year, was identified as one levy with the highest potential for expanding tax revenues.

He said the volume of corporate income tax submission had been growing at a rate around 40% per annum for the past few years, adding that growth rate was despite rampant tax evasion.

At that meeting, Vice Premiere Li Keqiang had told taxation officers present to strictly enforce the new Corporate Income Tax Law, and to ensure a steady and high growth rate for tax revenue.

Based on statistics obtained by the EO, China's national tax revenues for the first half of this year amounted to some 3.3 trillion yuan, some 30% jump compared to the same period last year.

However, such impressive growth failed to ease the worries at the Finance Ministry. Officials from the Ministry had repeatedly said that expenditure pressure had increased this year and would continue into the following year. Boosting tax revenue has thus become a priority task.

Spending Pressure
The source of the pressure could be traced back to the rare snow storms in southern China earlier this year and the Sichuan earthquake in May. Thus far, the State Treasury had at least appropriated over 150 billion yuan in relief funding for the two natural disasters.

In addition, due to the global crude oil price surges, the Ministry had on June 20 provided subsidies worth 19.8 billion yuan to oil companies and affected individuals. Besides this, it had also spent 36.3 billion yuan this year in aiding lower income groups against the backdrop of rising costs of living; another 27 billion yuan was spent on promoting energy-conservation and toxic gas emission-reduction.

Moreover, it had also invested several billions in building low-cost housing, flood and drought prevention infrastruture and revamping the rural primary and secondary schools, amongst other.

As a result of the unexpected natural disasters and other incidents, the Ministry's spending had exceeded its 2008 budget plan. The EO learned that since May, the Ministry had started planning budget readjustments and drawing funding from various accounts to meet the needs.

For instance, the 70-billion yuan post-quake reconstruction fund had drawn 60-billion from reserves called the Budget Stabalization Fund, while the remaining came from a host of other sources such as the welfare lottery fund, taxes and state-owned assets operation funds.

The spending pressure did not stopped there, as quake-hit areas that had lost sources of income would depend on the Ministry over the next several years.

The Dilemma
Despite the spending pressure, policy to increase tax revenue had yet to set in; for example, there was still no news of when the long-delayed resources tax would be implemented.

On the contrary, tax reduction measures had continued to come into effect. For example, the new Corporate Income Tax Law would actually lead to a loss of some 90 billion yuan of revenue due to new pre-tax exemptions and other amendments.

In addition, the stamp duty cut that took effect in April would cause another 50 billion yuan losses to the state coffer next year if calculated based on last year's trading volume.

On top of all these, the central Government had also lowered or waived certain taxes in the quake-hit areas, including value added tax, personal income tax, and sales tax.

Some industry associations held that the government should consider dishing out more preferential tax policies to enterprises currently under pressure from tight credit control at home and slowed export due to global economic uncertainties.

However, financial authorities were facing a dilemma too, said one official: "Presently, we are facing great expenditure pressure and are busy optimizing the financial budget."
Another one said: "More tax cuts? What if our tax revenues fail to meet next year's expenditure?"