BEIJING: China will set its biggest tax overhaul in a generation this Sunday as it tries to boost economic growth by cutting costs for service providers and manufacturers and prodding them to invest.
The new value-added tax system eases the burden on companies in an effort to stimulate an economy whose slowdown has dented China’s confidence and reverberated across the globe. The model also aims to spur China’s transition away from low-cost manufacturers to service providers such as insurers and entertainers.
But the overhaul holds risks for the world’s second-biggest economy. Experts say the new tax rules are complex, unclear or subject to interpretation and continue to rely on paper rather than digitized invoices. Companies and their advisers say they were given inadequate time to adapt to a host of new rules, rates and business practices and are scrambling to meet Sunday’s deadline. The date was announced in March.
The government is paying for the $77 billion in lowered tax burden on companies this year and other stimulus measures by allowing the fiscal deficit to rise to 3% in 2016 from 2.3% in 2015. That shortfall adds pressure to already stretched budgets.
China’s tax agency didn’t respond to a request for comment.
Still, economists say the transition is among the few substantial fiscal boosts to China’s economy this year after it slowed to 6.7% growth in the first quarter, its slowest pace since 2009.
“It’s really the only fiscal stimulus we’ve seen so far,” said Iris Pang, an economist with investment bank Natixis, part of France’s Groupe BPCE. “Nearly all companies should benefit.”
China began its conversion from a business tax to a value-added tax, or VAT, three decades ago, but in 2012 it began applying the VAT in earnest to spur its service industry. On Sunday, the overhaul is complete with the inclusion of the construction, real estate, consumer and financial sectors, bringing a total of 11 million companies into the system, the finance ministry said.
The tax changes are part of a broader attempt by China to reduce red tape and find new engines of growth—including Internet commerce, advanced technologies and robotics—in order to counter the burden of rising corporate debt, factories churning out products there’s little demand for and higher unemployment in the manufacturing sector with its potential for social unrest.
But companies could take years to restructure in ways that take full advantage of the VAT with its consequent economic benefits. Many of the new growth sectors are a fraction the size of traditional pillars of the economy such as manufacturing and infrastructure. And even as Beijing encourages entrepreneurs, the preferential credit, protected markets and controlled pricing it extends to state-owned companies end up crowding out private companies, economists say.
