China's structural tax cuts boost economic vitality

China's latest efforts to implement structural tax cuts will benefit its economic restructuring and promote steady growth, analysts have said.

Starting from Aug. 1, value-added tax (VAT) reforms, which replace the turnover tax with a value-added duty in transport and some service sectors, will expand nationwide from the current 12 provinces and municipalities to further reduce tax burdens on businesses.

Also effective on Aug. 1, China will suspend the VAT and turnover tax for small businesses with monthly sales of less than 20,000 yuan (3,236 U.S. dollars), which will benefit more than six million small companies and boost employment and income for tens of millions of people.

VAT refers to a tax levied on the difference between a commodity's price before taxes and its cost of production, while turnover tax refers to a levy on a business's gross revenues.

Bai Jingming, deputy head of the Fiscal Science Research Institute under the Ministry of Finance (MOF) said that expanding the pilot VAT reform is an important step in the reform of the fiscal and taxation systems.

"It calls for an improvement in the VAT system, as well as the adjustment of tax revenue distribution between the central and local governments," Bai said.

The VAT reform was first introduced in Shanghai in January last year and was later expanded to another 11 regions, including the cities of Beijing, Tianjin and Shenzhen.

"The structural tax cuts will help alleviate tax burdens for businesses and individuals, boost business vitality and increase employment and incomes," said Zhang Bin, a researcher at the Chinese Academy of Social Sciences, a government think tank.

In the first five months of the year, the reform eased tax burdens by 40.6 billion yuan for 1.29 million businesses in the regions that first piloted the program, according to the State Administration of Taxation (SAT).

The tax break for small and micro-sized enterprises, which usually accept interest rates 10 to 30 percent above the guideline rate, will ease the credit crunch and inject vigor into job-generating small businesses, Zhang added.

Statistics from SAT showed that the tax break will reduce the tax burden for small and micro-sized enterprises by 20 billion yuan.

Analysts believe that the structural tax reductions do not simply mean cutting tax rates, but are a demonstration of the government's determination to secure stable growth and restructure the economy amid a continuous economic slowdown and increasing risks in the financial market.

"The structural tax reduction will significantly boost economic growth and optimize the country's economic structure," said Liu Shangxi, deputy head of the Fiscal Science Research Institute under the MOF.

China's economy has been stuck in a protracted slowdown, easing to 7.5 percent in the second quarter from 7.7 percent in the first three months.

The government has adopted a different approach by not launching a one-off fiscal and monetary stimulus package, but instead introducing a set of market-oriented reforms to boost the economy.

As part of the reforms, the structural tax cuts serve as an important role in "developing strategic and emerging industries, energy-saving businesses and the service sector by giving enterprises more access to credit and alleviating their tax burdens," said Liu.

In the long run, the structural tax cuts will provide an equal institutional environment for healthy economic development, he said.