Real support for SME recovery
By Chen Ke  ·  2023-02-17  ·   Source: NO.8 FEBRUARY 23, 2023
Tax officers explain relief policies at a cable company in Fuzhou, Fujian Province, on February 13 (XINHUA)

Since the onset of the COVID-19 pandemic, supporting policies from all government levels have become essential to help small and medium-sized enterprises (SMEs) recuperate.

Tax rebates, as well as tax and fee cuts and deferrals, have offset the impacts to some extent, but these policies are not always likely to immediately benefit all SMEs, therefore requiring the government to roll out more relief measures that will bring stable expectations to the businesses.

Effective support 

Rising raw material prices, high pandemic control costs, shrinking orders, financing problems and recruitment difficulties… SMEs, caught up in the pandemic over the past three years, are deeply afflicted by these challenges.

Zhou Dewen, deputy head of the China Association of Small and Medium Enterprises, who has been following the development of SMEs, said both the central and local governments have undertaken a series of measures to revive the economy and help SMEs manage extreme headwinds. Fiscal and financial policies have played a particularly prominent role in supporting enterprises, including value-added tax (VAT) credit refunds, tax and fee cuts, and inclusive loans to micro and small businesses.

Figures from the State Taxation Administration showed that tax refunds as well as tax and fee cuts and deferrals totaled 4.2 trillion yuan ($618.56 billion) in 2022. Small and micro enterprises as well as self-employed businesses benefited the most from this relief, with nearly 80 percent of self-employed businesses exempted from tax obligations last year.

According to Vice Minister of Finance Xu Hongcai, the total amount of tax rebates and cuts reached a record high in 2022, with VAT credit refunds becoming a key "tool."

Previously, companies in a VAT credit position, where they have more VAT to be deducted from purchases than VAT due on sales, were not entitled to refunds. The amount to be credited could only be carried forward to the next taxable period and deducted from the VAT due.

China has been implementing tax and fee cuts since 2016, continuously lowering the level of the macro tax burden, or the share of a country's tax revenue to nominal economic output over a certain time period. And so, as the space for tax and fee cuts by lowering the tax rates and tax base had gradually narrowed, the large-scale VAT credit refund became the main component of China's 2022 tax and fee policy package.

Financial capacity is the foundation for tax and fee cuts, and the VAT credit refunding needs to be advanced in orderly manner. This policy, enacted for six industries including manufacturing in April 2022 and extended to seven more sectors since July that same year, has immediately benefited eligible businesses. Wholesale and retail, hospitality and catering are among the newly added ones.

Figures showed that as of November 10, 2022, VAT credit refunds totaled 2.3 trillion yuan ($338.73 billion). The manufacturing industry benefited the most with a tax rebate of 617.6 billion yuan ($90.96 billion), or 26.7 percent of the total. Micro and small businesses received 917.8 billion yuan ($135.17

billion), accounting for 39.7 percent of total refunds.

The tone-setting Central Economic Work Conference in December 2022, which specified China's economic priorities in 2023, stressed to continue proactive fiscal policy and prudent monetary policy, while intensifying macro-control and coordinating policies to forge synergy for high-quality development.

The government has since formulated detailed measures to further support market entities. For instance, the Ministry of Finance and the State Taxation Administration jointly issued a notice in January to exempt businesses with monthly sales of 100,000 yuan ($14,790) or less from the VAT; the People's Bank of China, the country's central bank, announced that same month it would increase financial support for domestic demand and supply systems and guide financial institutions to better solve the financing difficulties facing micro and small businesses, which are mostly privately owned.

Stabilizing expectations 

Xu Hongcai, Deputy Director of the Economic Policy Committee with the China Association of Policy Science, said the Central Economic Work Conference proposed the primary 2023 goal to be the ensuring of stable economic growth, which means to ensure the stable operations of market entities, or "enabling the country's more than 160 million market entities to have business to engage in."

Zhou has observed that today's SMEs face the difficulties of sluggish market demand, insufficient cash flow, high pressure in terms of repaying loans and interests, as well as rising operating costs.

According to a survey report released by the Chinese Academy of Fiscal Sciences, from 2018 to 2020 the proportion of total corporate tax payments in sales revenue dropped by 0.87 percentage points every year on average in China, with 66 percent of surveyed enterprises having an average tax burden below 5 percent. Despite this backdrop, enterprises still feel great cost pressures, which industry experts attribute to non-transferrable public risks, such as the COVID-19 pandemic.

In a recent interview with state broadcaster China Central Television (CCTV), Beijing Mayor Yin Yong addressed the pressing need to improve the capital city's ability to ensure normal production and social life and increase support for enterprises, as to allow them to recuperate. According to him, when proposing this year's targets for economic growth and tax revenues, the government must consider allowing businesses to have more financial and other resources at their disposal for recovery and further development.

Sun Wenkai, Deputy Director of the National Institute of Small and Medium-Sized Enterprises at Renmin University of China, summarized in an interview with CCTV the challenges in resuming production for enterprises he'd surveyed in Xiamen, Fujian Province: Inadequate demand leads to insufficient utilization of production capacity, raw material prices remain high and labor costs keep increasing.

The key to revive a business is to restore market expectations. "The pandemic has damaged the morale of many entrepreneurs. Their confidence comes from both their own business strengths and government support. To boost the confidence of private entrepreneurs, the government must stand with businesses," Zhou said.

Risk resistance 

On January 28, the first working day after the seven-day Spring Festival holiday, the State Council held an executive meeting, underlining efforts to spur a steady economic recovery. With a focus on high-quality development, optimizing the business environment and advancing key projects, several provincial-level

governments announced new incentives. For instance, Beijing and Shanxi Province recently declared they will extend the policy of allowing enterprises to defer some social insurance payments to the end of this year.

The State Council's leading group for promoting SME development recently issued several measures designed to help micro, small and medium-sized enterprises overcome difficulties in production and operation through policy and financing support, expanding demand and ensuring stable supplies and prices of bulk raw materials. As part of the measures, by the end of this year, at least 40 percent of government procurement projects will be reserved for SMEs.

Industry experts believe SMEs, as one of the most significant contributors to national economic growth, matter a lot to overall economic and social development, and favorable policies are of great significance in offering them relief. These companies must also consider the long term and grasp the opportunities generated by government policies and improve their abilities in technology and management innovation, as to realize their industrial transformation and development goals. 

The author is a reporter with China Report magazine 

Copyedited by Elsbeth van Paridon 

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