China has been carrying out a tax system adopted in 1994, when the government conducted important reforms to the old system.
But since then, it has had little impact on the system.
The government did not further improve the system mainly due to fluctuations in the macro-economic situation.
Between 1998 and 2002, the Chinese economy grew at a low rate, due to the impact of the Asian financial crisis.
As a result, economists suggest the government restrict economic recessions but stimulate economic growth through tax reductions.
They proposed to reform the tax system, including a shift of valued-added tax from the production-based one to a consumption-based one and expanding the tax to cover construction and service sectors.
They believed the reform, although it would result in a loss of fiscal revenue, could help stimulate the economy and improve the tax system.
However, the government thought it needed to increase revenue to solve a series of social and economic issues such as unemployment, reform on State-owned companies and social instability.
The government kept the tax system unchanged, but beefed up tax collection.
The repeated delay of unifying enterprise income tax policies for domestic and foreign companies was also because of the fluctuations of the macro-economic situation, besides the insufficient domestic demand resulting from economic structural problems.
Discussions and research on the issue have lasted more than eight years.
Voices for unifying the taxes have become stronger in recent years, following China's accession to the World Trade Organization.
But the government worried the reform would have an impact on the inflow of foreign direct investment.
The government believed this would result in an insufficient external demand, which could increase the insufficiency of overall demand.
The Chinese economy has entered a fast development period since 2003.
The fast fiscal revenue growth made the external environment favourable for tax system reform.
However, the government began to face new problems.
Over-investment has been found in sectors such as steel and cement.
As a result, the trial reform of the value-added tax reform in Northeast China, planned to start in the beginning of this year, was delayed to the second half of the year, for fear the reform would further stimulate investment.
The country's tax system reform has always given way to the government's macro-control efforts.
It seems the urgency of tax system reform was less important than the need of macro-control.
But the government has an urgent need to actively push the tax system reform forward.
China's tax revenue grew at an average annual rate of more than 15 per cent since 1994.
The ratio of tax revenue to the gross domestic product also increased constantly.
However, a majority of companies did not feel their tax burdens increase.
Meanwhile, the contradiction between fiscal revenue and expenditure became prominent, although it eased somewhat in 2003 and 2004.
It was difficult to understand why the government, which collected a large amount of taxes during the past decade, still faced the problem of insufficient fiscal expenditure.
An investigation found the government usually offered tax favours or returned taxes to companies.
The nominal tax rate could not reflect the real relationship between the government and the companies.
That is to say, the real tax rate for companies was much lower than the nominal rates.
The government collected a large amount of taxes from companies, which kept the country's nominal tax revenue growth at a high rate, but it also returned part of the taxes to some companies, which lowered those companies' tax burdens.
The tricks were widely practiced in developed areas.
It is difficult to say whether the practice was good or bad.
The lower real tax rate helped protect tax sources and promote company development.
But it was unfair for various companies in different industries and areas and possibly led to corruption.
More seriously, it challenged the effectiveness and solemnness of the tax law.
For example, local governments in different areas set different thresholds for personal income tax.
This trend, if not timely curbed, would make the country face chaos in tax order.
The reason the governments offered tax favours or returned taxes to companies was mainly because the present tax system was far from perfect.
The tax system reform lagged behind the economic development and the reform on the country's economic mechanism.
One entrepreneur said that if a company handed in taxes to the governments in accordance with the present tax law, the company would not earn a profit and could not keep its competitiveness.
His remarks, if true, suggest the present nominal tax rate was much too high.
He suggests the government lower the nominal tax rate close to the real one and beef up tax collection to keep a fair tax burden for all companies.
The entrepreneur's suggestion was in line with the central government's overall tax reform target.
The government should try to solve the issue of frequent tax favours and tax returns through tax system reform.
A regularized and perfect tax system was required to map it out.
A further reform was also required on the fiscal mechanism, the fiscal relations between the central and local governments and the transition of government functions.
Under the present economic situation, the government should try to co-ordinate the relationship between macro-control and tax system reform, while stably push forward the reform.
The overheating was only seen in some industries and was a structural problem.
The tax system reform could be in line with the requirement by the structural adjustment.
The start of the trial reform on the value-added tax in Northeast China was a good example.
Industries which were required to curb investment under the macro-control efforts were not included in the reform.
As a result, the reform did not have a negative impact on the macro-control efforts.
However, it helped make preparations for the spread of the reform to the entire nation in the future.
The government should timely track the results of the trial reform.
It should also carry out the consumption tax reform as soon as possible.
The existing consumption tax system lagged behind the economic development.
Such tax in some industries was too heavy.
For example, the heavy tax burden for motorcycle manufacturers has greatly affected the development of the industry.
Frequent tax favours and rampant tax evasions also made the tax unfair for different companies.
Meanwhile, some new high-grade consumption items which should be taxed were not included.
The active role of consumption tax in resource re-allocation and income distribution has been decreasing.
The government could reform the tax step by step, as it did not encounter many contradictions with the macro-control.
The government should also speed up reform on unifying enterprise income tax policies for domestic and foreign companies.
Under the current situation, the government could set a relatively higher unified tax rate.
For example, the rate could be changed to 28 per cent.
The higher tax rate and tax burden were in line with the present macro-control situation, which did not encourage investment.
The government should also unify local tax varieties such as real estate tax and city maintenance and construction tax, for domestic and foreign companies.
Although the tax reform might have an impact on foreign companies' direct investment in China in the short term, it would not have much impact on the country's overall economic development in the long term.
China's stable economic and social development, as well as the country's huge potential market, were major attractions for foreign companies.
A unified enterprise income tax was beneficial for fostering domestic demand and increasing the competitiveness of domestic companies.
