To meet the requirements of the World Trade Organization (WTO), the government is pushing ahead with policies encouraging the development of the software industry, a senior official from the Ministry of Information Industry said.

"We should do the planning for the development of the software industry in the 11th Five Year Plan (2006-10) well and actively push the legislation of the State Council's circulars 18 and 47 into laws or regulations to meet the rules of the WTO," said Lou Qinjian, vice-minister of the information industry, at the opening of the ninth China International Software Exhibition.

The State Council released Circular 18 in August 2000, which encourages the development of software and integrated circuit (IC) industries through government funds, procurements, financing, engineer training and tax rebates.

It sets a value-added tax rate of 17 per cent for software and IC companies, compared to 33 per cent for most other industries, but software and IC companies can also get the extra taxes back, if their actual value-added tax burden exceeds 3 per cent.

They can also get reductions or exemptions from income taxes and import taxes for major equipment.

However, tax rebates for the IC industry provoked complaints from the United States, European Union and Japan, which claim they run contrary to WTO rules and are unfair to foreign companies.

After rounds of negotiations, the government decided to cancel the tax preference for the IC industry from April, although full tax rebates on exports still stand.

Circular 47 from the State Council, released in July 2002, outlined goals and policies for the development of the software industry.

The sector, which has limited exports and accounts for just 3 per cent of the global total, has not been complained about by other countries, but the government nevertheless has decided to revise its approach under WTO principles.

The two circulars, especially No 18, have played a significant role in the development of the domestic software industry.

Zhang Qi, director-general of the department of electronics and information products under the MII and a strong supporter of the development of the domestic software industry, said software companies had received 12 billion yuan (US$1.45 billion) in value-added tax rebates by the end of 2004.

Although that is still a small amount, the policy has largely stimulated the enthusiasm of software companies.

Industry revenue in 1999 was just 44 billion yuan (US$5.31 billion), but this has risen to 230 billion yuan (US$27.78 billion).

The number of software companies with revenues of more than 100 million yuan (US$12 million) surged from 38 in 1999 to 214 last year.

Possible policy changes will not harm software developers, but will support them within the framework of the WTO.

Lou said his ministry will continue to improve the legal environment for the development of the software industry, including rules helping software companies with financing, government funding for research and development, as well as more aggressive strikes against piracy.

The government will continue to stress the use of legal products in government agencies and commercial organizations.

Zhang said provincial government departments procured 112,000 copies of operating systems and 180,000 copies of office software last year.

Lou also urged big companies to take the initiative in developing domestic software standards and actively participating in international standardization drives.

Chinese software companies are already quite strong in Linux operating systems, office software and information security software, and some alliances have been formed by leading software companies, trying to build open standards for the industry.

A Changfeng Open Standard Platform Software Alliance was formed in April in Beijing to promote the development of Linux-based software.

Another China Open Source Software Promotion Alliance was cemented in July 2004, with the aim of developing a domestic standard for Linux software, to link different versions of software on the market, as well as to co-operate with Japan and South Korea in regional standards.