Companies

Tax system hampering service sector growth

By Zhou Yan (China Daily)
Updated: 2010-06-26 10:29

BEIJING - The heavy tax rate imposed on China's service sector will make it difficult to realize the country's growth target for the industry between 2006 and 2010, industry insiders said.

"Many companies in the tourism industry operate on very narrow profit margins, and the government's high taxation has pushed some to the edge of bankruptcy," said James Dong, president of China Express Tours, a Shanghai-based travel agency.

Dong's company has to pay around 7 percent of its earnings in taxes, which is hefty given the sector's feverish competition that has resulted in low margins.

In fact, Dong is not alone. Firms in logistics and catering face similar problems, which is slowing the service sector's overall growth.

According to the 11th Five-Year Plan (2006-2010), the weight of added value in the service industry to the gross domestic product (GDP) will increase by 3 percentage points from 2005 to 43.3 percent by the end of this year.

Its weight in 2009 was 42.6 percent, which makes the target hard to achieve in 2010 if it maintains the average growth rate of the past four years.

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The sales tax on the sector, the amount of which is calculated by turnover rather than by profits, is too irrational and hefty to boost its growth, experts said.

"The tax levied on the service sector is much higher than that on the manufacturing sector, even though the latter is more profitable," said Hu Yijian, a professor in tax studies at Shanghai University of Financial Economics.

According to Hu, the tax rate ranges from 3 percent in areas like transportation to 5 percent in sectors such as catering and tourism.

China's tax system, which imposes a high levy on companies rather than individuals, has stifled the development of the entire industry, experts said, who called for a radical tax reform to help stimulate the country's tertiary sector.