Unified Tax System Planned

Chinese officials and experts have more or less reached an agreement to adopt a unified tax system to replace the current system which offers preferential policies to foreign investors.

"Tax officials and experts are now discussing the details of the new tax system,'' said Ni Hongri, a research fellow with the Development Research Centre under the State Council.

But it is difficult to say when the new scheme will come into force since it has yet to be approved by the Standing Committee of the National People's Congress, said Ni, who participates in the tax discussions.

Zhang Peisen, a senior researcher with the Taxation Research Institute under the State Administration of Taxation, said the timetable for implementation of the new system would depend on China's accession to the World Trade Organization (WTO).

"The sooner the country enters the world trade body, the earlier the system will be put into practice,'' he said.

Both Ni and Zhang said the new system will allow domestic and foreign firms to compete on an equal footing.

The system will not endanger China's efforts to attract foreign investment, they said.

The Chinese Government has offered preferential income tax policies to foreign investors to encourage them to invest in China since 1978 when the country initiated its reform and opening up policies.

Chinese enterprises pay around 22 per cent in income tax while foreign-funded firms pay just 12-15 per cent.

These tax incentives have played an active role in attracting foreign investment, improving the country's technological level, according to Ni.

But tax incentives have also led to a slow-down in domestic investment, a restriction on the purchasing and manufacturing of domestic equipment and a serious loss of tax income, she said.

"The tax incentives have resulted in more advantages than disadvantages because the incentives co-existed with such non-tax trade barriers such as higher tariffs and import quotas from which domestic companies could benefit.''

However, Chinese companies will be at a disadvantage if the Chinese Government continues to practice preferential tax policies because the country will have to gradually remove trade barriers when it enters the WTO.

"The WTO accession is prompting an overall tax system reform designed to bring China in line with other countries,'' Ni said.

The country's current tax system, which relies heavily on indirect taxes, including value added tax, makes tax revenue more vulnerable to evasion and other problems.

Indirect taxes now account for more than 60 per cent of China's tax receipts.

She said direct taxes could play a more effective role in fuelling the economy, and their proportion of the total tax revenue should be improved to at least 50 per cent, which is still lower than in developed countries.

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