Tax Breaks Aimed at Helping Service Sector

China will accelerate the reform of its tax system this year to shore up the transition of its economic growth pattern, said Xie Xuren, minister of finance, at a press conference during the National People's Congress (NPC) in Beijing on Monday.

The government will replace sales tax with value-added tax (VAT) for the service sector to unify tax implementation on goods and services and extend the consumption tax to high-energy-consuming products and high-end goods, said Xie.

In addition, it will also extend resources tax as well as property tax to a broader range, while reducing the tax burden on people with low incomes by raising the income tax threshold.

"We will make better use of taxes' role in adjusting the economy and distributing income, to stimulate enterprises' development, guide consumer spending and accelerate the transition of the development pattern," he said.

According to Xie, the government will start this year with a pilot program to impose VAT on some producer services industries - services that support manufacturing - while reducing the sales tax on them at the same time.

"The gradual unification of taxes on goods and services will boost development of the services sector," he said.

The government's goal of developing China's service industries during the 11th Five-Year Plan (2006-2010) failed to achieve all it set out to do within the time frame. Analysts said the sector is crucial to the country's transformation of its economic pattern, and it has huge potential for rapid growth during the next five years.

"VAT is levied only on manufacturing, while services are subject to a business tax that raises a much smaller amount. Given the heavy dependency of local governments on VAT revenue, they have a strong incentive to promote manufacturing, rather than services," said the Asian Development Bank in a report.

Xie said that a preferential tax policy will also be implemented to help some small and medium-sized enterprises that have low profits, and the policy will aid industries involved in conserving energy, reducing emissions, protecting the environment and creating new jobs.

But the country will face more fiscal pressure in 2011, partly due to planned taxation reforms, because revenue growth is likely to slow and spending is set to remain high, said the ministry in the government's annual budget report delivered to the NPC on March 5.

"Fiscally, there is still a significant imbalance between our revenue and expenditures Revenue will decrease somewhat because of the higher basis in 2010, unsustainable growth in imports and exports, the cooling automobile market and the ongoing tax reform," it said.

The government has reduced its planned deficit to 900 billion yuan (US$137 billion), 150 billion less than that of 2010, and lowered the deficit ratio against GDP from 2.5 percent last year to no more than 2 percent.

"Higher investment in agricultural and water conservancy infrastructure, support for the reforms of education, healthcare and social security, and increasing subsidies to low-income people will all put considerable pressure on expenditures," said the ministry.

China will also give provincial-level governments the power to adjust local tax categories, rates, and cuts in the next five years to ensure their fiscal revenues in accord with administrative responsibilities, and put all kinds of government revenue into budget management for better control of actual fiscal conditions, said Xie.

Li Yang, deputy head of the Chinese Academy of Social Sciences, said it's time to change the fiscal system completely because the old framework can no longer adjust to rapid economic growth and solve emerging problems. The current frame of China's finance and tax system was set up in 1994.