The government should consider levying higher taxes, even imposing a windfall-profit tax, on resource and energy exploration, a sector dominated by State-owned enterprises (SOEs). The proposal is part of leading think-tank economist Justin Lin's road map to rein in the economy after an average annual growth of 9.7 percent for almost three decades. 

"It can be a prescription for several symptoms," said the director of Peking University's China Center for Economic Research. The measure can help speed up SOEs' restructuring and enrich the government's coffer, besides helping improve the environment.

The average tax rate for resource and energy exploration in the country is as low as 1.8 percent compared to the world average of about 20 percent. The government's resource utilization fee is very cheap, too. Take coal mining for example, the government charges mine owners just 1,000 yuan (US$120) a year for every square km of area explored.

The low taxation rate has caused reckless exploitation of resources, bringing in large "unfair" profits for the SOEs and new investors, and creating a shockingly huge amount of waste. "In some regions, mine owners are apparently granted mining rights almost without having to pay any tax or fees and that's unfair," Lin said.

A National Development Research Centre (NDRC) report says that an average mine in Northwest China's Shaanxi Province extracts only 30 per cent of the coal from a seam, leaving the rest buried forever simply because of the low resource utilization fees.

Raising the resource utilization tax or imposing a windfall-profit tax would force companies to reduce environmental damage caused by their projects, he said. "Up to 50 percent of windfall tax can be imposed on the profits of some companies."

The tax revenue can be directly channeled to the local governments' coffers in the resource-rich regions, which can use it for education, healthcare and other public services.

The central government has imposed a windfall tax on oil explorers and that has contributed to its treasury. But it has to spend a huge part of this money to subsidize crude oil refineries. As a result, local people cannot benefit from the resources being explored on their land.

Conceding that some SOEs are still burdened with redundant staff, laid-off workers and other social security problems, Lin said further SOE reform could help make his taxation proposal a reality.

A higher taxation rate could help curb the losses to State assets, too, he said. "Many of the SOEs are planning to go public overseas (and some have already done so). That will benefit overseas stock buyers instead of people at home if the tax rate remains low."

(China Daily August 20, 2007)