From Dividend To Impetus

Tax and fee cuts boost economic performance while spurring innovation

Adiehard fan of her mother’s dumplings, Liu Jun had often longed to share the “taste of mom’s cooking” with more people and finally in 2016, she put her dream into action. The entrepreneur from Xinjiang Uygur Autonomous Region in northwest China started her dumpling business in her hometown Beitun, naming her company Beitun Nanhuwan Food after the city.

Though a new player, Liu feels confident about the prospect of her business, especially after the new pro-business policies introduced by the government.

“The recent tax and fee reductions have been a boon for us startups,” Liu said, calculating how she has benefited. Implemented since January 1, one of the new measures is the revision of value-added tax (VAT). Earlier, it had to be paid by all businesses with monthly sales of 30,000 yuan ($4,268) and above. Now it is applied to those with monthly sales of 100,000 yuan ($14,225) and above.

These policies have saved Liu over 50,000 yuan ($7,113). In addition, another inclusive tax deduction and exemption policy for micro and small enterprises (MSES), she estimates, will annually cut taxes for her company by 100,000 yuan.

“For MSES that usually make small profits, the money saved equals the profits made from hundreds of deals,” she said.

Thousands of beneficiaries like Liu are enjoying the dividends of the new tax and fee policies. In his New Year speech, President Xi Jinping stressed the importance of implementing the cuts, saying, “Policies to cut taxes and fees must take root to ease the burden on enterprises.”

The past three quarters had seen those policies take effect, saving 1.78 trillion yuan ($252.7 billion) in total for businesses and individuals with over 1.51 trillion yuan ($214.8 billion) in tax breaks and 272.5 billion yuan ($38.8 billion) of cuts in social insurance contributions, the State Taxation Administration (STA) said on October 30.

The effects go beyond visible statistics. “Underpinned by a raft of tax and fee cuts, dividends are being unleashed, which will boost economic performance while injecting impetus,” Fan Yong, a professor with the Central University of Finance and Economics in Beijing, said.

The beneficiaries

The private sector took the lion’s share of the tax deductions and became the primary beneficiary, Cai Zili, a spokesperson with the STA, said. In the first three quarters, tax breaks for private economy taxpayers, including private enterprises, reached 964.4 billion yuan ($137.1 billion), accounting for 64 percent of the total.

Besides enjoying tax reductions, private enterprises in some places are allowed to defer paying tax if there are difficulties. In Zhejiang Province in east China, for example, the authorities are offering such a facility to ease companies’ capital pressure.

“The policy support on tax is a timely help for us private enterprises,” Wang Yongjun, head of a supply chain management company in Zhejiang, said. “Our company recently applied to the tax bureau for an extension to pay 35.6 million yuan ($5.06 million) in taxes and it was approved in two working days, which helped us a lot in terms of the capital chain.”

Public firms have also benefited. According to a report by China Securities Journal on October 28, companies in traditional industries such as power and nonferrous metals, manufacturing and consumer sectors have seen more benefits from the cuts.

According to the STA, the tax rollback in the manufacturing sector accounted for tax

universal for public firms,” Fu Lichun, a senior analyst with Northeast Securities, told Xinhua News Agency. “The cuts can improve the profit margin of listed firms while expanding the demand as consumers’ tax burden is also lessened.”

Specifically, listed firms in the consumer industry will share more dividends partly because their demand side is more sensitive to tax and fee rollbacks, Fu added.

The policies will also benefit the economic performance as a whole. According to a recent report by the Institute of Public Policy and Governance, Shanghai University of Finance and Economics, on the effect of the VAT reduction, the reform will continue to promote economic growth in the next three years or so. By increasing profit and employment, tax cuts will boost people’s income and consumption. It is estimated that the VAT reform will increase China’s consumption by 1.41 percent in 2019.

In terms of macroeconomics, it will encourage the GDP to grow cumulatively by 0.36 percent, which is equivalent to a 301.4-billion-yuan ($42.8 billion) increase, calculated on the base of 2018 statistics.

Innovation booster

scheme, formerly meant for small and medium-sized technological enterprises, to all enterprises.

“Each year, our R&D expense deductions can save us more than 5.3 million yuan ($753,130) in tax payment, which will provide sufficient cash flow to purchase production equipment and increase investment in R&D,” Wang Gang, General Manager of Sea-gull, a watchmaker based in Tianjin, north China, said.

“With our tax burdens eased, we can strengthen our investment in R&D and productivity, which is significant for the company’s sustainability,” Lu Kunzhong, Secretary of the Board of Wuhan Raycus Fiber Laser Technologies, said.

According to the STA, 45 percent of the taxpayers in the manufacturing industry repurposed the tax and fee savings to invest in R&D in the first three quarters. The R&D expenses of 100,000 key tax source enterprises monitored by the taxation authorities in the first three quarters soared 19.3 percent year on year, an increase of 3.4 percentage points over the whole of 2018.

Zhang Gongyun, head of Himile Science and Technology, a tire product manufacturer in Shandong Province in east China, said since the implementation of tax and fee cuts on a larger scale this year, his company has saved 150 million yuan ($21.3 million), which has provided impetus for its technological innovation and development.

“Such support has not only accelerated the fund turnover, more importantly, it has enhanced our confidence in R&D investment and innovation,” he said.

Zhang Lianqi, deputy head of the Chinese Tax Institute, said the government has responded to the new downward pressure by issuing a string of policies and measures to shore up the confidence of market entities. Of these measures, he called the large-scale tax and fee reductions “the most effective, direct, inclusive and fair.”