Challenges Tackled With Financial Innovation
Tax and fee cuts ease cost burdens, optimize growth structure
China's economic growth has faced fresh challenges, particularly since the third quarter of this year, with rising commodity costs and sporadic locally detected cases of COVID-19 affecting recovery in the services sector.
Experts say there are two major ways to cope with any downward pressure-further fueling debt for investment, or scaling up tax and fee cuts for businesses to stimulate growth and unleash potential.
In view of COVID-19, particularly in recent weeks and months, China is leaning more toward the latter solution. Rather than resorting to a high fiscal deficit, the government has been seeking financial innovation with a more effective spending mechanism and deeper tax and fee cuts.
The Central Economic Work Conference, which ended on Dec 10, noted that more "front-loaded measures" would be taken to stabilize growth. It also confirmed that new tax breaks and fee cuts would be introduced for businesses and infrastructure investment would be shored up next year.
Su Jingchun, an associate professor at the Chinese Academy of Fiscal Sciences, or CAFS, who has spent most of her research career studying the nation's income distribution and fiscal spending mechanism, believes such action will help the smaller business community in China survive and thrive, sustaining growth at a difficult time.
"There has been some notable innovation in the fiscal mechanism in the past two years, and we, as researchers, believe these changes will be conducive to China's long-term healthy growth, particularly for economic recovery," she said.
Gu Qingyang, an associate professor at the Lee Kuan Yew School of Public Policy at the National University of Singapore, said the sustained tax and fee cuts show China's strong resolve to pursue high-quality growth.
The country has made strenuous structural adjustment efforts in pursuit of such expansion, he said.
These efforts were planned before COVID-19 emerged, but there are numerous challenges, and the lingering impact of the pandemic over the past two years adds to growth difficulties, Gu added. Cutting taxes and fees is among the measures taken to tackle such pressure.
"Tax and fee cuts are not only about alleviating the cost burden for businesses, but are also aimed at optimizing the country's growth structure. They allow the government to lend more support to businesses in certain fields that are critical for high-quality growth, such as poverty alleviation and technological innovation," Gu said.
"Reducing costs for these businesses will better bring out their potential, and at the same time, avoid increased fiscal spending or hurting the country's economic structure."
Sustained reductions
Over the past two months, the central government has reiterated on a number of occasions that it will work to introduce tax and fee cut packages, and some temporary tax breaks.
Meeting global business leaders during a virtual dialogue organized by the World Economic Forum on Nov 16, Premier Li Keqiang said China would introduce and implement more intensified tax relief measures to help market entities-especially micro, small and medium-sized enterprises-through their difficulties.
On Nov 1, the State Taxation Administration and the Ministry of Finance announced to defer taxes for small and medium-sized manufacturers for three months from October. The smallest manufacturers, with annual sales revenue of less than 20 million yuan (US$3.13 million), will have all their taxes deferred for this period, while 50 per cent of taxes will be deferred for manufacturers with revenue of 20 million yuan to 400 million yuan a year.
Shi Yinghua, a professor at the Chinese Academy of Fiscal Sciences, said the preferential tax and fee cut policies have been particularly well formulated this year for micro and smaller businesses.
"Such businesses have borne the brunt of fresh challenges resulting from rising commodity costs and COVID-19. This sector is also particularly vulnerable when resisting risk, and is likely to face burnout due to pressure from rising costs," Shi said.
With the nation on track to economic recovery from COVID-19 this year, the central government has announced preferential tax policies since March.
The value-added tax threshold for small-scale taxpayers will be raised from 100,000 yuan to 150,000 yuan for monthly sales. In addition to preferential policies already in effect, income tax for micro and small enterprises and the self-employed with annual taxable income of less than 1 million yuan has been halved.
In recent months, Shi and her team have investigated the effectiveness of these tax breaks, finding them particularly helpful in alleviating businesses' operational costs in the second half of this year.
"For an operational business, time is valued as capital that can generate wealth. This is why the recent tax deferral policies are critical for businesses that need a lifeline, and will effectively ease the pressure they face," Shi said.
The State Taxation Administration said in the middle of last month that newly introduced tax and fee cuts amounted to 910.1 billion yuan for the first three quarters of this year.
Feng Ming, a senior researcher at the Chinese Academy of Social Sciences, said that from a macroeconomic point of view, compared with conventional quantitative policy tools, tax and fee cuts can better cater to China's need for structural transition and economic upgrading, where the services sector and consumption lead growth.
He believes preferential tax breaks for smaller businesses are likely to continue for another year at least.
Su, the CAFS professor, agreed with this view.
"Tax and fee cuts, particularly at such a trying time, leave limited room for structural macro policy, but require greater competence in balancing fiscal spending and fiscal funds management. This underscores the government's strong resolve to protect market entities," Su said.
Innovative mechanism
In addition to the deepened tax and fee reductions, a special transfer payment mechanism, which ensures fiscal funds go straight to prefecture-and county-level governments and also directly benefit businesses and the public, has been key to institutional innovation in China's fiscal spending since COVID-19 emerged.
The mechanism removes the review and approval procedures at provincial and city government level, meaning that businesses receive funding more quickly.
Last year, when the economic impact of COVID-19 was most pronounced in China, some 2 trillion yuan in special transfer payments were issued under this direct mechanism. These payments arrived in county-and district-level government accounts and with millions of smaller businesses much faster than in previous years.
Wei Ping, head of the fiscal department in Luyang district, Hefei, Anhui province, said the most innovative features of the newly devised special transfer payment mechanism are full transparency of fund flows and a much quicker allocation of funds.
"The overall scale of funds we receive from the central government has not changed, but the amount of money coming directly to us through the special transfer payment mechanism has risen. Such funds effectively assisted us to address urgent needs early last year and helped many businesses stay afloat," she said.
This year's Government Work Report confirmed that the central authorities would make it normal practice to directly allocate budgetary funds to prefecture-and county-level governments, and allocate more funds under this mechanism.
Su said this is a sign that the nation's fiscal system is maturing.
"With economic growth in China reaching a higher level, there is less room for macro policy maneuvering. Normalization of directly allocated budgetary funds means the central government is placing more emphasis on the effective use of funding," Su said.
She added that this year, when recovery became the main focus of macro policies, directly allocated budgetary funding showed that the government's determination to protect businesses would continue.
With the end of the year approaching, experts are banking on some limited support policies to anchor market expectations.
In view of recently detected COVID-19 cases, Feng, the Chinese Academy of Social Sciences researcher, suggested that despite further tax cuts, related compensatory relief measures should be studied and introduced to better handle market expectations.
"COVID-19 cases in China have now become sporadic, with a small number of people being affected. Yet such cases are also hard to predict," Feng said.
"We believe a compensation mechanism to cope with such situations well in advance will help keep business confidence stable."
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