Challenges tackled with financial innovation

Sustained reductions

Over the past two months, the central government has reiterated on a number of occasions that it will work to introduce tax and fee cut packages, and some temporary tax breaks.

Meeting global business leaders during a virtual dialogue organized by the World Economic Forum on Nov 16, Premier Li Keqiang said China would introduce and implement more intensified tax relief measures to help market entities－especially micro, small and medium-sized enterprises－through their difficulties.

On Nov 1, the State Taxation Administration and the Ministry of Finance announced to defer taxes for small and medium-sized manufacturers for three months from October. The smallest manufacturers, with annual sales revenue of less than 20 million yuan (US$3.13 million), will have all their taxes deferred for this period, while 50 per cent of taxes will be deferred for manufacturers with revenue of 20 million yuan to 400 million yuan a year.

Shi Yinghua, a professor at the Chinese Academy of Fiscal Sciences, said the preferential tax and fee cut policies have been particularly well formulated this year for micro and smaller businesses.

"Such businesses have borne the brunt of fresh challenges resulting from rising commodity costs and COVID-19. This sector is also particularly vulnerable when resisting risk, and is likely to face burnout due to pressure from rising costs," Shi said.

With the nation on track to economic recovery from COVID-19 this year, the central government has announced preferential tax policies since March.

The value-added tax threshold for small-scale taxpayers will be raised from 100,000 yuan to 150,000 yuan for monthly sales. In addition to preferential policies already in effect, income tax for micro and small enterprises and the self-employed with annual taxable income of less than 1 million yuan has been halved.

In recent months, Shi and her team have investigated the effectiveness of these tax breaks, finding them particularly helpful in alleviating businesses' operational costs in the second half of this year.

"For an operational business, time is valued as capital that can generate wealth. This is why the recent tax deferral policies are critical for businesses that need a lifeline, and will effectively ease the pressure they face," Shi said.

The State Taxation Administration said in the middle of last month that newly introduced tax and fee cuts amounted to 910.1 billion yuan for the first three quarters of this year.

Feng Ming, a senior researcher at the Chinese Academy of Social Sciences, said that from a macroeconomic point of view, compared with conventional quantitative policy tools, tax and fee cuts can better cater to China's need for structural transition and economic upgrading, where the services sector and consumption lead growth.

He believes preferential tax breaks for smaller businesses are likely to continue for another year at least.

Su, the CAFS professor, agreed with this view.

"Tax and fee cuts, particularly at such a trying time, leave limited room for structural macro policy, but require greater competence in balancing fiscal spending and fiscal funds management. This underscores the government's strong resolve to protect market entities," Su said.