How to Reduce Taxes for SMEs?
On April 8, China's Ministry of Finance (MoF) confirmed that any company with annual taxable income under 100,000 yuan will have its business income tax halved starting from Jan. 1 this year till the end of 2016. According to the State Administration of Taxation (SAT), more than 85% of China's small and medium-size enterprise (SMEs) will enjoy preferential taxes.
Tax break for SMEs is sure a good thing. However, can the income tax reduction and exemption really lessen the burden of enterprises? Although the tax authority says it may help a number of small low-profit enterprises to obtain larger growth space, but is it true? or in other words, where should we get started to actual tax cut?
According to “Fiscal revenues and expenditures of March 2014” released by the MoF, the profits of industrial enterprises in recent years are not optimistic anyhow. In the first quarter of 2014, the total enterprise income taxes aggregated 566.3 billion yuan, increased by 8.9%. It should be noted that the enterprise income taxes include the taxes paid by financial enterprises and the real estate enterprises. In view of the industrial enterprises alone, the income taxes were 190.6 billion yuan, approximately accounting for one third, increased by only 0.2%. In March, such tax growth rate dropped by 28.8% from the same period last year.
There’s no doubt that tax break will lighten the burden on enterprises and vitalize the enterprises, thus maintaining stable employment. However, even in case of the tax cut, there are different options, like cutting the corporate income tax or VAT. As it stands, the government chose to cut the corporate income taxes. However, such taxes can be levied only if enterprises could make profits. Then, as it stands, do our enterprises make a profit?
From the above-mentioned reduced industrial corporate income taxes, we can conclude that industrial enterprises have great difficulties to gain profits in recent months: now that enterprises fail to make a profit, they don’t need to pay any corporate income tax for sure.
Then, is it a good move to reduce the corporate income tax during the economic downturn? Worse still, if all enterprises fail to make any profits, the income tax cut would actually be self-deceptive as enterprises have no income tax to be levied upon. Then how can we cut taxes on enterprises?
A feasible method is to lower the turnover tax. During this year's two sessions, tax break to enterprise is one focus of the NPC and CPPCC. According to the statistic record of Liu Hanyuan, a national CPPCC deputy, “in view of the financial data of the listed companies in China in the first three quarters in 2013, the total taxes actually paid by all listed companies reached 1.83 trillion yuan, accounting for more than one third of all values created by them”. Such a result is attributable to the fact that China’s current tax burden is mainly the turnover tax. Though the ultimate bearers of the turnover taxes are consumers from the theoretical perspective, yet the relevant taxes are paid by month in consideration of the fact that all commodities have a sales and payment collection period, which means that on many occasions the manufacturers or traders may bear the tax cost—even bear the cost for paying taxes due to the fact that the commodities are not sold out.
But more important, our indirect tax is based on the proportional tax rate which tends to be regressive, which means that taxpayers’ actual tax burden is lower during the economic cycle of prosperity; but during the economic recession, the earnings of corporate will drop, but its tax burden will not be lowered as it keeps sales.
As a matter of fact, it’s possible to reduce indirect tax. Again in view of “Fiscal revenues and expenditures of March 2014” released by the MoF, although the corporate income taxes dropped by 7%, the gross fiscal income increased by 5.2%. Where does the growth come from? The domestic VAT amount reached 235.4 billion yuan, increased by 10.5%, particularly the industrial VAT gained an income growth up to 3.5%; the domestic consumption tax reached 58.8 billion yuan, increased by 0.3%; in spite of a drop at 1.6% over the same period last year, it increased by 5.1% considered the factor of business tax transformed to VAT; the VAT and excise tax for imported goods reached 117.1 billion yuan, increased by 6.9%; the tariffs registered at 23.2 billion yuan, increased by 10.9%.
From this point of view, though the corporate income taxes drop, the fiscal revenues still increase, which should be attributable to the turnover taxes. In other words, if the corporate income tax is lowered rather than the turnover taxes, it will not ease the enterprises’ burden during the economic slowdown period. On the contrary, it may add tax burdens – with the increasing inventories, many tax burdens that should be borne by consumers are borne by the enterprises.
As for SMEs, the tax break is an utterly inadequate measure. It is better for us to take MoF’s statistics for instance, the total profits of the state-owned enterprises (SOEs) in the first quarter this year was 533.7 billion, decreased by 3.3%. Be more precise, SOEs controlled directly by the central government earned 432.15 billion yuan, increased by 5.1%, and others run by lower-level authorities made profits of 101.55 billion yuan, dropped by 3.8%. As we know, most SOEs controlled directly by the central government are at the industrial upstream as the monopolies. Though the local state-owned enterprises are mostly at the competitive industries, they still had great advantages than SMEs. When such SOEs can’t make big profits, we can easily imagine the profit growth space of SMEs.
In a word, if we really want to reduce taxes for SMEs, it is urgent to reduce all turnover taxes rather than the income tax.
(Published on Southern Metropolitan Daily)
