China's new tax reform will ease the tax burden for the country's small and medium enterprises, and revive and enhance their healthy development, experts said on Tuesday.

The Chinese government announced a long-awaited tax reform on Monday, under which companies will no longer pay value-added tax (VAT) for equipment purchases.

It would reduce the tax burden on companies and save them an estimated 120 billion yuan ($17.59 billion) a year, the biggest cut ever, said officials from the Ministry of Finance (MOF) and State Administration of Taxation.

In 2007, the VAT revenue exceeded 1.5 trillion yuan, accounting for 31 percent of the total tax income.

Under the reform, VAT exemptions for exempted imported equipment and VAT rebates for foreign companies buying made-in-China would be both abolished.

Zhang Bin, researcher at the Institute for Finance and Trade Economics of Chinese Academy of Social Sciences, said the reform put foreign and domestic companies on an equal footing.

MOF fiscal science institute director Jia Kang said the reform would encourage enterprises to improve equipment and technology, and push them to become the main body of long term market investment.

Renmin University of China Professor An Tifu said the sound development of small and medium enterprises would offer more job opportunities.

Xie Baijun, chairman at a Zhejiang-based thermo-electric company, said the reform would help pare costs on technological upgrades.

His company's annual investment stood at 20 million to 30 million yuan. Two million to 3 million in taxes would be cut after the reform.

Ten million yuan would be saved from a 100-million-yuan project, which could be used to further expand investment, he added.
The reform on VAT was proposed as early as 2003. The 11th Five-Year plan set the goal of shifting from a production-based to a consumption-based VAT regime from 2006 to 2010.

In 2004, the tax reform was piloted in eight industries, including equipment manufacturing and the chemical and oil industry in the northern Heilongjiang, Jilin and Liaoning provinces.

From July 2007, the trial was extended to eight industries, including power and excavating sectors in 26 traditional industrial bases in the six central provinces.

In July this year, quake-hit areas in Sichuan province and five cities in Inner Mongolia Autonomous Region were covered.
Zhang said the reform had to be gradually implemented to prevent economic overheating.

However, due to the global economic downturn, concerns over falling investment emerged. The policy would stimulate investment and boost business development.

MOF officials said the ongoing financial crisis had a negative impact on the real economy. The extension of the reform nationwide would empower companies, increase competitiveness and enhance their risk-resistance. It would cushion the blow incurred by the worsening world economy.

(Xinhua)  2008-11-12

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