China's tax reform aims to beef up businesses

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China's tax reforms continue, as the country plans to reduce taxes on businesses and individuals by more than 800 billion yuan (about 126 billion US dollars) in 2018. In addition, China also plans to scrap an additional 300 billion yuan in administrative fees and operating charges.

“The most interesting thing is the merger between the state tax bureau and local tax bureaus below the provincial level. And the service industry will still get the most benefit. In the meantime, high-tech industries also get a lot of tax incentive,” said Andrew Choy, Greater China International Tax Services leader.

Meanwhile, China also wants to reduce its fiscal deficit and increase spending. It is counting on stronger growth for increased tax revenues, even as the tax burden eases. One analyst says that while the tax base is likely to expand, the debt burden on local governments will probably rise.

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“There will be efforts to increase the tax revenue by increasing the tax base. The environmental tax is one of those, but it cannot be very substantial, so we anticipate a higher debt level for both local governments and the central government,” said Dan Wang, an analyst at the Economist.

The property tax is also on the policy radar. There has not been a timetable for it, mainly because China has too many kinds of real estate property, and the evaluation model for property taxes are complicated. But even a low tax on property could give a strong boost to local government’s finances.

“The central government discourages the local government to rely on the land financing, because it is dangerous and not sustainable. But for local governments, so far it’s still their biggest revenue. We have estimated even with very low level of property tax, it has potential to replace the land financing for the local governments,” Wang added.

Globally, the International Monetary Fund warned that competitive tax cuts among governments would trigger a surge in global inflation as the economy might become overheated.

It will be central banks’ cue to narrow their balance sheets to keep the situation stable.

China is unlikely to tag along with the tightening moves due to its neutral monetary policy.

But it has scrapped its growth target on the broad M2 money supply, departing from the credit-led expansion of the past.

The job falls onto local governments, as they continue to issue new debt to fuel the economy, while keeping the debt to GDP ratio unchanged.