Redesigning the Dragon Financial Reform in the Peoples Republic of China — страница 3

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inflation. Christine Wong, an expert on the Chinese financial system, identifies three necessary changes to restore the health of the budget: First, the tax administration must be strengthened. Second, the tax structure must be reformed so that it is neutral across products and sectors. Third, the revenue-sharing system between local, provincial and national levels of government must be revamped, with clearer tax assignments in line with each levels set of responsibilities. The central government’s control over the tax system and share of total revenues will likely have to be increased. The next two sections will address these proposed changes.[13] Taxation The Pre-Reform Tax System Prior to economic reforms, China’s tax structure was based on the Soviet model. Enterprises

remitted their profit to the government, retaining only what was necessary to pay expenses. Revenues were collected by local governments, and a certain amount was filtered up to the central government. In 1984, this was replaced by a system of enterprise income taxation reform, in which companies were taxed on their profits, as the government tried to respond to economic imbalances created by the emerging private sector. The turnover tax (the Consolidated Industrial and Commercial Tax, or CICT), which had been the largest contributor to the government’s annual revenue, was replaced with a business tax, a product tax, and a value-added tax (VAT). These featured highly differentiated tax rates across sectors, types of good and service, and form of firm ownership. Most private

firms paid a base tax rate of 33%, while most state-owned enterprises (SOEs) were nominally taxed at 55%.[14] In practice, however, taxes paid were governed by a contract responsibility system (CRS), in which enterprises negotiated individually with local government units. This system created conflict of interest because often the local government was both tax collector and enterprise owner. Not only were there differentiated rates which distort economic activity, there was little incentive for full tax remittance back to the central government under this system. (See Table 6 in Appendix, page 23, for a description of the tax structure from 1985-1991.) 1994 Reforms In 1994, the Chinese government began to respond to these problems by enacting a series of reforms. The CICT was

abolished and the following taxes were created or modified: Enterprise Income Tax. This unified corporation tax taxes companies at a single 33% rate. Foreign enterprises and joint ventures are still enjoying lighter tax burdens, because of the fierce competition between regions to attract foreign investment, but these privileges are to be gradually eliminated. Personal Income Tax. Operates on a sliding scale, with a maximum of 45%. Not yet comprehensively-implemented. Value-Added Tax (VAT). Replaces the product tax of the CICT. Most goods taxed at 17%, but agricultural and food products will be taxed at 13%, and small-scale businesses will pay flat rate of 6%. Consumption (Excise). Focuses narrowly on “luxury goods:” tobacco, alcohol, gasoline, and a few others. Business tax

for services. Service industries will face a business tax of 3% to 20% on sales in place of the VAT. This tax also will apply to transfer of intangible assets and the sale of real estate.[15] Capital Gains. A capital gains tax was to be introduced in 1994, but its implementation was postponed because of concern over its adverse impact on China’s fledgling stock markets. 1996 Reforms In 1996, China announced plans to reduce its import tariff rate from 35.9% to 23%, while abolishing preferences for certain goods and, importantly, eliminating exemptions from import tariffs (currently, over 80% of imports are exempt from import duties for various reasons). [16] This step alone should help to reduce the recent losses in customs revenue. The Ninth Five-Year Plan also includes

provisions to introduce taxes on interest earnings and inheritances, policies designed to reduce income disparity. Revision of Tax Collection Structure In order to make the above tax policy changes effective, the tax collection system must be revamped and greatly improved. The current structure is based on a system of revenue contracts between enterprise and government unit, and between local and central governments. One of the necessary reforms involves tax exemptions, which local governments often have the authority to grant to enterprises who for one reason or another are unable to pay their taxes. This is a fundamental weakness in the Chinese fiscal system: local government has decision-making authority to grant exemptions on a tax the proceeds of which may in large part be