Ni Hongri, a senior researcher at the State Council's
Development Research Center, said the current macroeconomic
situation should not be an obstacle to the timely implementation of
the value-added tax (VAT) system reform despite the current high
levels of fixed asset investment.
The government had originally planned to carry out the reform on
a trial basis beginning April 1. It was to be applied to eight
industries, including oil, chemicals, auto manufacturing and
metallurgy, in the old northeast China industrial base. The plan
was postponed owing to a fast rise in fixed asset investment during
the first quarter.
The central government felt that implementation of the tax
reform plan would fuel additional investment, a significant problem
at this time for national economic development. Excessive growth in
some sectors and regions is putting a strain on transportation and
power supplies, and driving up the price of raw materials.
"The tax reform plan, which is aimed at attracting companies to
invest in the provinces of Jilin, Liaoning and Heilongjiang, will
reduce companies' tax burdens," Ni said.
China currently uses a production-based VAT system in which
fixed assets are classified as consumer goods and are subject to
tax. As a result, enterprises cannot claim tax deductions for the
purchase of fixed assets such as plant and equipment.
The system places a heavy burden on enterprises wanting to build
their fixed assets, especially for capital- and
technology-intensive enterprises. The system thus poses a hurdle to
economic restructuring.
Experts have suggested the government replace the present system
with a consumption-based one, which allows companies to deduct
certain expenses when buying new plant and equipment.
Xie Xuren, director of the State Administration of Taxation,
said at the end of last year the government would implement a
consumption-based VAT system in the eight selected industries in
northwest China this year. Based on the experiences gained from the
experiment, the government would later implement the system across
the country, he said.
Ni said the tax reform plan was an important measure taken by
the central government to revive the old industrial base.
"More investment encouraged by the new tax plan is helpful for
companies' systemic reforms in the three provinces," she said. "The
government should implement the plan in a timely manner."
Ni added that the government could take other steps to cool
fixed-asset investment. For example, it could resume levying an
adjustment tax on fixed-asset investment in industries that are
considered overheated.
Zhao Zhiyun, a senior economist with the Chinese Academy of
Social Sciences, believes the government will not postpone the new
tax plan for long.
"It would rather use monetary measures than fiscal and tax
measures to adjust the current economic development," she said.
Since the second half of last year, the central government has
taken several steps to prevent fixed asset investment from growing
too much. These include raising the bank reserve requirement,
tightening loans to the steel, aluminum and cement industries, and
beefing up management over development zones.
Those measures will have a great impact on fixed asset
investment this year, according to Zhang Liqun, a senior researcher
with the Development Research Center.
"The country's fast increase in fixed asset investment will come
down in the remainder of the year," he said, adding that a slowdown
in fixed asset investment should retard the country's economic
growth this year.
Zhang forecasts GDP will grow 9 percent this year.
(China Daily April 23, 2004)