"Given the government's measures to deepen the reform of value-added tax (VAT) launched in May, our company expects to save more than 10 million yuan ($1.47 million) in taxes this year," said Zhang Dexi, head of Dengkou County branch of dairy giant Mengniu Dairy Co. Ltd., in December 2018.

The company in north China's Inner Mongolia Autonomous Region is an example of how tax cuts have benefited businesses in the country.

When discussing the Chinese economy in 2018, "tax cuts" will always feature as a notable keyword. From the reduction of VAT rates and personal income tax reform to the tax incentives to support innovation-driven companies, the theme was dominant in all aspects of the economy.

It is expected that 1.3 trillion yuan ($191.7 billion) can be saved across the year, according to Xu Hongcai, Assistant Minister of Finance, at a press conference on January 15. This is higher than the goal of 1.1 trillion yuan ($162.2 billion) stated at the outset of 2018.

In Beijing alone, 40 billion yuan ($5.9 billion) was saved, according to a press release from the Beijing Municipal Bureau of Finance on January 7.

Room to continue

As China's GDP growth stood at 6.4 percent in the fourth quarter of 2018, the lowest since 2009, cutting taxes is a priority for macro-control measures. According to a report from Securities Daily, throughout 2018, cutting taxes and administrative fees was discussed at least 27 times at State Council executive meetings. At the second State Council executive meeting of 2019 held on January 9, a number of inclusive tax-cut measures were announced to benefit small businesses, a sign that the trend is set to continue throughout 2019.

"As the Chinese economy shifts to higher-quality development, alleviating the corporate burden will stimulate the vitality of various businesses," said Li Xuhong, a professor with the Beijing National Accounting Institute.

Like Mengniu, Panlong Yunhai Pharmaceutical Co. Ltd. in southwest China's Yunnan Province has also benefited from the cut in VAT. "Since the tax rate was cut, our company saved over 200,000 yuan ($29,499) of VAT in May 2018 alone, and other related additional taxes have also been cut," said Zhang Ying, the company's chief financial officer.

China streamlined the VAT brackets by reducing the number from four to three in 2017. Since May 1, 2018, the tax rate has been cut from 17 percent to 16 percent for manufacturing and some other industries, and from 11 percent to 10 percent for transportation, construction, basic telecom services and farm produce. The tax authority estimated that this would have reduced VAT by 240 billion yuan ($35.4 billion) in 2018.

"VAT is the biggest tax category in China, and there is still room for further cuts by reducing the VAT brackets from three to two," said Li. "Social insurance premium rates are also likely to be reduced to alleviate the corporate burden."

Anticipated outcomes

Xiong Yuan, chief macroeconomic analyst of Guosheng Securities Co. Ltd., said reducing the tax burden on businesses and increasing the proportion of direct tax levied on the income or profits of the person who pays it rather than on goods or services, will, to some extent, stimulate domestic demand.

"Reducing personal income tax will stimulate the growth of the consumer market. While inspiring confidence, this policy may lead to a significant increase in consumption volume," said Zhang Yiqun, head of the Jilin Provincial Fiscal Sciences Research Institute.

China raised the threshold for personal income tax exemption from 3,500 yuan ($516) to 5,000 yuan ($737) per month as of October 2018. On January 1, measures on special personal income tax deductions took effect. Expenditures in six areas—children's education, continuing education, medical treatment for serious diseases, housing loan interests, rent and elderly care—can be deducted from taxable income.

Supply-side structural reform must also be advanced to help maintain economic growth, said Tang Yunyi, a researcher with the Shanghai Academy of Social Sciences.

"The purpose of tax cuts is not only to lessen the pressure on enterprises and maintain economic growth. More importantly, they aim at stimulating the market and improving the economic structure," said Tang. "Through cutting taxes, the government should accelerate the shift of the driver of growth and nurture new ways of economic stimulation while reducing low-end and ineffective supplies."

Tang added that after a long period of high-speed growth, the Chinese economy is facing increasing downward pressure. Some enterprises, especially private ones, are facing challenges from markets both at home and abroad, with their profitability, operations and ability to pay debts all being affected. They are in need of favorable fiscal policies to ensure their survival.

Jiang Chao, chief economist of Haitong Securities Co. Ltd., said to pursue growth by relying on domestic demand, China must reduce tax for residents, promoting consumption by increasing personal incomes.

"Also if China hopes to pursue innovation-driven development, the government must reduce tax for enterprises," Jiang continued. "Tax cuts are conducive to the success of the Chinese economy, initiating a new pattern of development."

Copyedited by Craig Crowther

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