China's broad-based tax cuts to benefit small and micro enterprises

Note: The following is an edited translation of an article from the Chinese-language "Commentaries on International Affairs."

At the beginning of the New Year, China's government launched new policies that respond to the downward pressure on economic growth. They include tax reductions for small and micro enterprises, which will be in place for three years. This is the first among a series of tax cuts and other stimulatory measures for 2019, and is expected to give a huge boost to the country's economic development.

Savings for the Chinese New Year. [Photo: VCG]

Most companies in China will enjoy a tax cut this year. This is because they are targeted at companies with assets under fifty million yuan, fewer than 300 employees, and taxable income less than three million yuan. This represents a significant relaxation in the definition of what constitutes a small business. More than 95 percent of taxpaying enterprises in China fit this definition, and 98 percent of them are private firms.

The market is expected to respond positively to these unprecedented tax cuts, which will see small and micro enterprises enjoy progressive tax rates. Enterprises with taxable income of less than one million yuan will be taxed at 5 percent, which is 20 percentage points lower than the standard rate. And those with a taxable income between one million and three million yuan will be taxed at 10 percent, which is lower than the standard rate by 15 percentage points.

The new deal will also raise the value-added tax (VAT) threshold for small businesses, including sole traders, from 30,000 yuan to 100,000 yuan of sales a month. In other words, businesses with sales worth less than 100,000 yuan will be exempt from paying the VAT. At the same time, the central government is allowing local governments to reduce resource taxes, urban maintenance and construction taxes, stamp duty, urban land use taxes, and cultivated land occupation taxes, as well as local education surcharges.

According to tax department figures, China's small and micro enterprises already had their tax burden reduced to the tune of 184 billion yuan in the first 11 months of last year. And official estimates show that this new round of cuts will reduce the burden on small businesses by another 200 billion yuan a year. This will undoubtedly enhance private investment and consumption, at a time when the global economic downturn and the unresolved trade frictions between China and the United States have put pressure on China's economy, especially in sectors related to trade.

The measures China takes to deal with the cooling economy at home and abroad, and the growing pushback against globalization, has far-reaching global implications, as the country is home to the world's second largest economy. There are more than 100 million businesses in China, and small and micro enterprises account for the vast majority of them. Their healthy development helps to fuel the job market: As China's Premier Li Keqiang has said, these enterprises are the main channel for absorbing employment, and part of the government's rationale for introducing the tax cuts is that they will support employment. This will, in turn, be conducive to both the immediate and long-term development of the country's economy. But leaving small business owners with more money in their pocket means there will be less cash in the government's coffers. This is why Premier Li has urged government agencies to cut costs and raise awareness that government budgets will tighten.

In November, China's President Xi Jinping spoke highly of private enterprise and private entrepreneurship at a meeting with representatives of the business community. He promised to reduce the burden of corporate taxes and fees, and the tax reductions being introduced this year are a demonstration of him making good on that promise. Combined with the broader measures being introduced to help pump prime the economy, such as the move to cut the number of sectors closed to foreign investment (the negative list of market access), the broad-based tax cuts will help to improve China's business environment so that it will withstand the downward pressures.