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W ITH the introduction of value-added tax （VAT）， we will pay about RMB 400，000 less tax every year. With the money saved， we can employ ten more workers and generate RMB 5 million more in production value，” said Li Sheng， general manager of the East Century Technology Company.
Since the Enterprise Income Tax Law was implemented in 2008， China has taken pains to reduce tax burden on medium-sized and small enterprises. The recent promulgation of new policies on tax reduction is a clear sign that the government intends to boost the development of medium-sized and small enterprises even further.
Benefits of VAT
The replacement of business tax with VAT means that enterprises in the transportation sector and some in the modern service sectors now only pay VAT. This program was first launched on January 1， 2012 and trialed in Shanghai. Since August 1， 2013， the VAT program has expanded nationwide and covers more sectors： technology development and service， telecommunications， cultural and creative industry， logistics， tangible personal property rental service， authentication and consultation， and film and broadcasting.
The VAT that companies pay on raw materials and labor can now be deducted from tax payable， so enterprises pay less tax.
The East Century Technology Company develops and sells water conservation software. Last year， its operating revenue stood at RMB 52.8 million； the profit was RMB 11.2 million and the income tax it paid was over RMB 1 million.
According to Li Sheng， his company used to pay value-added tax on its software sales revenue and five percent business tax on its service revenue. Since the VAT reform， the company pays six percent VAT on its service revenue. Although the percentage is higher， the company in fact pays less tax now because it can deduct the VAT paid on previous links in the production process. That is to say， the VAT program eliminates double taxation.
Where the former business tax levied every link in business operations and involved heavy double taxation， VAT is charged only on the added value of each link in the production chain. Double taxation， therefore， can be avoided.
In terms of the design of the VAT tax rate， for most enterprises it is low. The rate for small enterprises is fixed at three percent and for service enterprises， six percent. But the rate for transportation enterprises has risen from three percent to 11 percent. Generally speaking， for most enterprises the tax burden has been eased. Wang Jun， director of the State Administration of Taxation （SAT）， pointed out that the replacement of business tax with VAT is a comprehensive and strategic move adopted by the State Council to upgrade the Chinese economy. Reducing tax not only eases taxpayers’ burden， but also boosts structural upgrading and economic development， thus providing an important opportunity for enterprises to develop in leaps and bounds.
SAT statistics show that 736，077 enterprises were newly covered by the VAT program as of August 1， and the number is expected to increase as the reform rolls out nationwide. In terms of tax reduction， the million-plus enterprises that were included in the pilot VAT program in 2012 paid RMB 4 million less tax that year. Jia Kang， director of the Research Institute for Fiscal Science at the Ministry of Finance， predicts that the total reduction in annual tax will be no less than RMB 300 billion when the program is in full operation.
Extending the Coverage
Since 2009， extending the coverage of VAT deduction has been a priority measure for China. Before 2009， taxpayers could only deduct the input VAT they paid for raw materials and transportation， but not for fixed assets such as production equipment and machinery. After 2009， VAT paid on fixed assets could be deducted， but consumption taxes they paid on cars， motorcycles and barges still could not be taken off from the total tax payable. On August 1 this year things changed： such consumption taxes can offset the amount of VAT an enterprise has to pay.
Wang Dongsheng， vice president of Zhonghui Certified Tax Agents Co.， Ltd.， believes that the expansion of the deduction policy to motorcycles， cars and barges has， on one hand， reduced tax burden on the enterprises， and on the other， boosted the relevant industries.
Mr. Song is general manager of Beijing Shuihai Technology Development Company. A few years ago， his company wanted to buy more cars to meet the needs of his expanding business， but he hesitated to do so because of the double tax policy. In August， his company purchased three cars worth over RMB 1 million. He estimated the company’s tax bill for August and September at around RMB 300，000， but when the consumption tax on the three cars is deducted， the amount of tax he actually has to pay is only RMB 130，000.
Tax Exemption for Small Enterprises with Thin Profits
Small enterprises have suffered increasing pressure in the face of the current economic slowdown. Most of them are in the service sector and generate thin profits. In the past， business tax and VAT were levied based on sales and operating revenue； therefore， taxation on all enterprises was the same and gave no consideration to whether their profit was high or low， or even whether they made a profit or a loss. In that way， many small enterprises normally earned relatively little but paid a lot. Since August 1， companies with monthly sales of less than RMB 20，000 are exempt from paying VAT and business tax. According to the Ministry of Finance and the SAT， an estimated six million taxpayers in the country no longer need to pay VAT and business tax.
Professor Hu Yi from the School of Public Economics and Administration of Shanghai University of Finance and Economics expounded the benefits of tax exemption. Take a small enterprise with monthly sales revenue at RMB 20，000 as an example. After the tax exemption， the company saves RMB 600 （RMB 20，000x3%） in tax payment every month， or RMB 7，200 every year. Generally speaking， small enterprises feature thin profits. If the profit rate is 10 percent， the profit of a RMB 20，000 enterprise is RMB 2，000. Even if the profit rate is 20 percent， the profits are merely RMB 4，000. Therefore， a RMB 600 tax exemption every month can be significant.
Liu Shangxi， deputy director of the Research Institute for Fiscal Science of the Ministry of Finance， pointed out that the number of small enterprises is huge； therefore， the coverage of tax exemption is wide. If a small enterprise has 10 employees on average， the policy will affect about 60 million people nationwide. The policy also lowers the tax threshold for new entrepreneurs. Newly established companies create more job opportunities， which in turn raise people’s income and inject vitality into social and economic development.
The sluggish economy has brought difficulties for enterprises and thus affected the government’s fiscal revenue. Some experts are worried that the continuing structural tax reduction policy will further affect China’s fiscal revenue. Even so， policy makers should take measures to raise the efficiency of current fiscal expenditure and insist on tax reduction policies for the development of real economies.
Since the Enterprise Income Tax Law was implemented in 2008， China has taken pains to reduce tax burden on medium-sized and small enterprises. The recent promulgation of new policies on tax reduction is a clear sign that the government intends to boost the development of medium-sized and small enterprises even further.
Benefits of VAT
The replacement of business tax with VAT means that enterprises in the transportation sector and some in the modern service sectors now only pay VAT. This program was first launched on January 1， 2012 and trialed in Shanghai. Since August 1， 2013， the VAT program has expanded nationwide and covers more sectors： technology development and service， telecommunications， cultural and creative industry， logistics， tangible personal property rental service， authentication and consultation， and film and broadcasting.
The VAT that companies pay on raw materials and labor can now be deducted from tax payable， so enterprises pay less tax.
The East Century Technology Company develops and sells water conservation software. Last year， its operating revenue stood at RMB 52.8 million； the profit was RMB 11.2 million and the income tax it paid was over RMB 1 million.
According to Li Sheng， his company used to pay value-added tax on its software sales revenue and five percent business tax on its service revenue. Since the VAT reform， the company pays six percent VAT on its service revenue. Although the percentage is higher， the company in fact pays less tax now because it can deduct the VAT paid on previous links in the production process. That is to say， the VAT program eliminates double taxation.
Where the former business tax levied every link in business operations and involved heavy double taxation， VAT is charged only on the added value of each link in the production chain. Double taxation， therefore， can be avoided.
In terms of the design of the VAT tax rate， for most enterprises it is low. The rate for small enterprises is fixed at three percent and for service enterprises， six percent. But the rate for transportation enterprises has risen from three percent to 11 percent. Generally speaking， for most enterprises the tax burden has been eased. Wang Jun， director of the State Administration of Taxation （SAT）， pointed out that the replacement of business tax with VAT is a comprehensive and strategic move adopted by the State Council to upgrade the Chinese economy. Reducing tax not only eases taxpayers’ burden， but also boosts structural upgrading and economic development， thus providing an important opportunity for enterprises to develop in leaps and bounds.
SAT statistics show that 736，077 enterprises were newly covered by the VAT program as of August 1， and the number is expected to increase as the reform rolls out nationwide. In terms of tax reduction， the million-plus enterprises that were included in the pilot VAT program in 2012 paid RMB 4 million less tax that year. Jia Kang， director of the Research Institute for Fiscal Science at the Ministry of Finance， predicts that the total reduction in annual tax will be no less than RMB 300 billion when the program is in full operation.
Extending the Coverage
Since 2009， extending the coverage of VAT deduction has been a priority measure for China. Before 2009， taxpayers could only deduct the input VAT they paid for raw materials and transportation， but not for fixed assets such as production equipment and machinery. After 2009， VAT paid on fixed assets could be deducted， but consumption taxes they paid on cars， motorcycles and barges still could not be taken off from the total tax payable. On August 1 this year things changed： such consumption taxes can offset the amount of VAT an enterprise has to pay.
Wang Dongsheng， vice president of Zhonghui Certified Tax Agents Co.， Ltd.， believes that the expansion of the deduction policy to motorcycles， cars and barges has， on one hand， reduced tax burden on the enterprises， and on the other， boosted the relevant industries.
Mr. Song is general manager of Beijing Shuihai Technology Development Company. A few years ago， his company wanted to buy more cars to meet the needs of his expanding business， but he hesitated to do so because of the double tax policy. In August， his company purchased three cars worth over RMB 1 million. He estimated the company’s tax bill for August and September at around RMB 300，000， but when the consumption tax on the three cars is deducted， the amount of tax he actually has to pay is only RMB 130，000.
Tax Exemption for Small Enterprises with Thin Profits
Small enterprises have suffered increasing pressure in the face of the current economic slowdown. Most of them are in the service sector and generate thin profits. In the past， business tax and VAT were levied based on sales and operating revenue； therefore， taxation on all enterprises was the same and gave no consideration to whether their profit was high or low， or even whether they made a profit or a loss. In that way， many small enterprises normally earned relatively little but paid a lot. Since August 1， companies with monthly sales of less than RMB 20，000 are exempt from paying VAT and business tax. According to the Ministry of Finance and the SAT， an estimated six million taxpayers in the country no longer need to pay VAT and business tax.
Professor Hu Yi from the School of Public Economics and Administration of Shanghai University of Finance and Economics expounded the benefits of tax exemption. Take a small enterprise with monthly sales revenue at RMB 20，000 as an example. After the tax exemption， the company saves RMB 600 （RMB 20，000x3%） in tax payment every month， or RMB 7，200 every year. Generally speaking， small enterprises feature thin profits. If the profit rate is 10 percent， the profit of a RMB 20，000 enterprise is RMB 2，000. Even if the profit rate is 20 percent， the profits are merely RMB 4，000. Therefore， a RMB 600 tax exemption every month can be significant.
Liu Shangxi， deputy director of the Research Institute for Fiscal Science of the Ministry of Finance， pointed out that the number of small enterprises is huge； therefore， the coverage of tax exemption is wide. If a small enterprise has 10 employees on average， the policy will affect about 60 million people nationwide. The policy also lowers the tax threshold for new entrepreneurs. Newly established companies create more job opportunities， which in turn raise people’s income and inject vitality into social and economic development.
The sluggish economy has brought difficulties for enterprises and thus affected the government’s fiscal revenue. Some experts are worried that the continuing structural tax reduction policy will further affect China’s fiscal revenue. Even so， policy makers should take measures to raise the efficiency of current fiscal expenditure and insist on tax reduction policies for the development of real economies.