VAT cut will provide huge boost to economy

Various sectors to benefit from tax reduction that will also result in more foreign investment to tackle global downward pressure

Starting next month, China's massive reduction of value-added tax will take effect, with manufacturing sector VAT dropping by 3 percentage points from the current 16 percent, to lower burdens on enterprises and boost the real economy.

Transport and other sectors will pay 9 percent in VAT, instead of the current 10 percent. The measures will tackle downward economic pressure, help attract more foreign investment and upgrade the economy, experts and company management said.

The move was first declared by Premier Li Keqiang in his Government Work Report to National People's Congress deputies when the annual session of the top legislature kicked off on March 5. It is expected to cut 2 trillion yuan ($297 billion) in taxes for more than 30 million enterprises in China.

The move was the sixth massive tax reduction since 2012. Details were released by the Ministry of Finance, the State Taxation Administration and the General Administration of Customs on Thursday.

At a State Council executive meeting on March 20, the first after the two sessions, Li said the tax reduction was meant to increase the share of enterprises in national income distribution, so that they can offer more employment opportunities and have a more sustainable source of fiscal revenue.

Li said China has more than 100 million private enterprises and individual owners, accounting for 90 percent of the country's market entities, as a backbone for employment.

Multiple measures should be taken to reduce tax burdens on market entities, particularly private and small businesses to further stimulate market vitality and withstand downward pressure on economic growth, Li said.

During his first inspection after the two sessions, Li visited the Ministry of Finance and the State Taxation Administration to see preparations for the VAT cut. He visited the ministry's division of value-added tax for the second time in three years on Thursday afternoon.

In 2012, China started a pilot program of replacing business tax with value-added tax in transport and six other sectors in Shanghai. Four years later, the replacement expanded to construction, real estate, financial and service sectors around the country.

On May 1 last year, the VAT rate for manufacturing was reduced from 17 percent to 16 percent, and transport and construction sectors saw a reduction from 11 to 10 percent. From May to December last year, 270 billion yuan was cut in value-added tax nationwide, with the manufacturing sector enjoying 35 percent of all VAT reduction, said the State Taxation Administration in January.

The upcoming VAT reduction will help promote the development of the real economy, especially for the manufacturing sector when the country faces new downward economic pressure and uncertainties in the international scene.

For example, machinery producer Guangxi Liugong Group will see its VAT bills reduced by 121 million yuan this year, said Xinhua News Agency.

Zeng Guang'an, Liugong's chairman, told China Daily that a reduction in tax and fees can substantially lower the burdens on enterprises and improve their profitability and international competitiveness.

For Zeng, who is also a National People's Congress deputy, the 13-percent VAT rate for the manufacturing sector can also help improve the business environment for the real economy.

Working with the newly-adopted Foreign Investment Law, lower taxation can significantly attract foreign investors as part of further reform and opening-up, Zeng added.

Shi Zhengwen, director of the Center for Research in Fiscal and Tax Law at China University of Political Science and Law, said the 2 trillion yuan tax cut is part of a proactive fiscal policy. Facing downward pressure, the government needs to strengthen adjustments with proactive fiscal policy to boost market vitality and give enterprises more confidence, he said.

"This year's tax reduction is massive in terms of tax volume and targets to reduce the pressure on manufacturing, the real economy and small and micro-sized enterprises, which are the pillar for the Chinese economy but now face difficulties," Shi said.