Yang Chongchun, deputy director of the State Administration of Taxation, recently gave his views on an upcoming tax policy adjustment that has raised questions among people in the business community and average Chinese citizens alike. For example: Will a tax cut policy be possible with the state trying its best to stimulate domestic demand? How will the State Administration of Taxation adjust the value-added tax? What about the need, according to the State Administration of Taxation, of hammering out an inheritance tax? What revisions will be made to personal income tax? When can domestic and foreign enterprises be included in the same corporate income tax system?

"I would prefer a timely, appropriate tax policy adjustment rather than a general 'tax cut'," said Yang who objects to the application of a tax cut as being too broad and unsuitable for the present economy.

"The taxation rate in China isn't in reality a high one. Take income tax as an example, the actual tax rate is a little bit over 20 percent though its prescribed rate stands at 33 percent. And the government collects 17 percent tax on the value-added tax, the largest circulation tax in China -- actually less than 17 percent," Yang Chongchun said.

Fixed-asset investment cannot offset the amount of value-added tax. The policy was adopted in 1993 to cool overheated investment. Now that investment is lagging, the policy should be modified, said Yang.

Though the country may see a loss of 50 to 60 billion yuan (US$6.04 to 7.25 billion), if fixed asset investment is allowed to offset value-added tax, enterprises will see an increase in their capital for production expansion, renovations and technological improvements. State tax revenue will also surge when fixed-asset investment turns out to boost corporate performance revenue. And domestic and foreign enterprises will operate under the same rules for fairer competition.

Enterprises are now under a heavy financial burden, according to Yang. The country collects about 160 billion (US$19.3 billion) yuan in taxes from enterprises, accounting for 15 percent of the gross domestic product (GDP). Administrative fees collected according to state rules from enterprises account for 7 to 8 percent of GDP while many unauthorized charges account for 5 to 8 percent. Enterprises contribute about 27 to 30 percent of GDP.

"We should first rule out all unauthorized charges, subtract unreasonable fees and adjust inappropriate parts of tax policy on enterprises only then can we alleviate the heavy burden on enterprises," Said Yang.

Inheritance tax law is brand new to Chinese people who for thousands of years have taken it for granted that all their earthly goods will go to their offspring without any tax or fees to the state. The inheritance tax is an important part of the impending taxation system reform, according to Yang. After income taxes, people usually have belongings to leave their heirs or donate to others. It is necessary to hammer out an Inheritance Tax Law to work with taxation of personal income.

"Inheritance tax is a tax closely connected with personal income tax. It is necessary to set up such a tax. But when and how to impose this tax has not been decided and will be deliberated at a later time," Yang said.

It is "high time to consider revisions" in the present Individual Income Tax Law since the law took effect 20 years ago and great changes have happened over the intervening years, Yang said. "Basic revision work has been finished and several draft revisions are now under the review of concerned administrative departments."

Debates about the revisions mostly focus on two issues, the tax rate and the limit on non-taxable income. China has nine tax brackets based on personal income ranging from 5 percent to 45 percent. According to a survey cited by Yang, 85 of a total of 90 countries surveyed have adopted a progressive tax rate, and 21 of those 85 countries have fewer than five tax brackets.

"The nine tax brackets on personal income tax may be adjusted, for example, to six," Yang said.

Though the nominal benchmark of non-taxable income is 800 yuan (US$96), Shenzhen adopts 1,600 yuan (US$193) and Beijing adopts 1,000 yuan (US$120) as their own limits. The total revenue from personal income tax has increased from 7.2 billion yuan (US$870 million) in 1994, 1.42 percent of total tax revenue, to 99.5 billion yuan (US$12 billion) in 2001, 6.5 percent of national tax revenue.

"The personal income tax plays an outstanding role in national tax revenue. But personal income tax will be more efficient, and also it will necessarily play a bigger role in regulating social wealth," Yang said. He added: "According to our estimates, an appropriate increase from the 800 yuan (US$96) benchmark, for example, to 1,000 or 1,500 yuan (US$120 to 180), will help alleviate the tax burden on people in the lower income bracket with a reasonable levy of a bit more on high income earners while causing no big loss in state tax revenue."

World Trade Organization rules call for fair competition environment for every enterprise. This is a great opportunity to speed up a combination of corporate income taxes [domestic and foreign enterprises] into one. Though that means foreign enterprises which have enjoyed preferential tax policies since the late 1970s may have to lose an advantage, Yang doesn't think it will affect China's investment environment.

"The corporate income tax will be likely set at 24 percent while neighboring countries set it at about 35 percent, so China will still be seen as promising, attractive to investors. And the combination, in my mind, also will not adversely impact state tax revenue," Yang said.

(粤港信息日报 [Canton and Hong Kong Information Daily], March 12, 2002, translated by Alex Xu for china.org.cn, April 3, 2002)