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China's current tax system needs to be adjusted in 10 major areas now that China has become a member of the World Trade Organization (WTO).
It has become a common wish among economists and government officials that China establishes a scientific and highly efficient tax system in line with the country's situation.
This is also the ultimate goal of China's tax system reform.
WTO accession provides excellent opportunities for the country to speed up its economic reform.
The government should seize this opportunity to improve the existing tax system to create favorable conditions for the country's sound economic development.
Enterprise Income Tax
Since China has become a WTO member, the country should at first unify enterprise income tax policies.
The country is now practicing dual-track income tax policies for domestic and foreign-funded companies.
The income tax rate for domestic companies is 33 percent, while foreign-funded companies stands at only 17 percent.
The country should implement a national policy for domestic and foreign-funded companies, because they should compete on an equal footing.
The new enterprise income tax rate could be set at 24 percent. The pre-tax deduction should also be unified.
However, some tax incentives should be allowed to remain for foreign-funded companies already operating in China, because the country should honor its previous promises.
Value-added Tax
Along with the rapid development of science and technology and adjustments in the industrial structure, China will have to shift its value-added tax (VAT) levies from the current production-based one to a consumption-based one.
Under the production-based system, fixed assets are classified as consumer goods and are subject to taxes.
As a result, enterprises may not claim tax deductions for the purchase of fixed assets such as equipment and machinery.
The existing system places a heavy burden on enterprises wanting to increase their fixed assets investments, especially for capital and technology-intensive enterprises.
The system thus poses a hurdle to economic restructuring, which is one of the major tasks the Chinese Government wishes to achieve.
China may gradually phase in the consumption-based VAT one sector at a time, starting with industries with heavier VAT burdens such as the high-tech and infrastructure industry.
The conversion of the system could take place in two phases. Initially, enterprises may be allowed to deduct the input VAT for the current year's acquisitions of machinery and equipment. Later, enterprises may be allowed to deduct the input VAT of purchased real properties.
Besides shifting to a consumption-based system, the VAT system should be expanded to cover more activities currently subject to business taxes such as transportation and telecommunications.
Consumption Tax
As a kind of tax variety which has special adjustment functions, the consumption tax should be levied on those who consume. The tax should not be included in the price.
The items subject to the tax should also be redefined. Daily-use items such as makeup should not be subject to the tax.
Other items such as high-grade imported wine and high-grade entertainment consumption should be included in the tax.
The government should also impose a consumption tax on industries which may do harm to the environment such as mining.
Personal Income Tax
Personal income tax has become a hot topic in recent years, because the threshold for taxation which stands at 800 yuan (US$96) was considered too low and some rich people managed to evade taxes.
Present personal income tax rates vary in 11 categories based on income sources - and this system does not have much control over an individual's total annual income.
Out-salary incomes are usually not taxed, unless people declare the income themselves.
The system has many loopholes which tax evaders exploit.
The most common is for business owners to show personal spending as company expenditures.
Some even include their personal incomes in enterprise turnover to evade personal income taxes that are usually higher than corporate taxes.
Taxation is aimed at people with high-level incomes to promote economic development and social stability.
As a result, the current 800-yuan (US$96) starting point for taxation on monthly income needs to be raised.
Personal income taxes should also be based on a combination of various means of incomes, including bonuses and dividends, instead of merely salaries like today.
Meanwhile, personal circumstances of an individual, such as supporting children and the elderly, may be considered before the tax is computed.
The government should also consider imposing an inheritance tax at a proper time to adjust income distributions.
Social Security Tax
The establishment of a social security system is a key issue for China's economic development. The creation of a social security tax is mainly aimed at guaranteeing the collection of funds.
Currently local governments in 19 provinces and municipalities have entrusted the local tax bureau to collect social security fees. The result is quite good.
This has laid a solid foundation for imposing a social security tax nationwide.
The social security tax rate - including those for pension, medicare and unemployment - could be 22 percent. The tax burden should be shared by residents and their employees.
The social security fund should be managed by the labor and social security departments.
Fees-for-tax Reform
The rural tax-for-fees reform is now practiced in about 20 provinces, which has greatly reduced the burden on farmers.
The reform should be expanded to the entire country.
The government also needs to reform and adjust the existing rural tax system, including the agricultural tax, to further reduce rural people's burdens.
Meanwhile, the government needs to speed up tax-for-fees reform in urban areas to alleviate the burden on enterprises.
The local tax system needs to be improved and the relationship between the central government and local governments should be made more clear.
Overall Tax Policy
In accordance with WTO requirements, China's tax policy should be unified and made clear.
The government should reconsider favorable policies given to foreign-funded companies and those in certain areas including western areas.
However existing favorable policies that are still valid should be allowed to continue.
The new policies should help create a fair, effective and rational competitive environment.
Tariff Mechanisms
With an aim to protect domestic companies' interests at this transitional period, the government should take advantage of special tariff items and protective measures.
Domestic companies, on the other hand, need to fully prepare in areas such as information, law and technology and to apply anti-subsidy and anti-dumping measures to protect the country's interests.
In order to encourage exports, the country should cancel quota systems and impose a zero tariff. The government should also offer all tax rebates.
New Tax Law Systems
Tax reform needs support from the financial system.
The financial system will have to define what items can be exempted from tax before a new tax system is put into practice.
The government should improve the existing accounting system and apply other internationally accepted measures such as offering rebates for re-investment.
The author Zhang Peisen is a senior researcher with the Taxation Research Institute at the State Administration of Taxation.
(China Daily December 2, 2002)
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