Ten years of tax reform in China - Who benefited?

Small businesses, individuals and the technology sector have been the focus of tax reforms.

Photo from CFP

Photo from CFP



China has gone through ten years of tax reform to help companies cut costs and be competitive. From 2013 to 2022, overall tax cuts accumulated to around 10 trillion yuan (US$1.4 billion) by some estimates, reducing the effective tax rate from 18 percent to 15 percent.

The reform is still in progress. Many items such as property taxes, are still being debated. What is known for sure is that tax is set to play a more important role in building the economy.

Ten years in review

2013 - Scheme to replace business taxes by VAT for selected transportation and service companies in Shanghai expands to more cities and provinces, reducing the overall tax burden for eligible businesses. Some small companies are exempted from VAT or sales taxes altogether.

2014 - VAT reform expanded to railways, postal service and telecommunications. Previous 6- and 4-percent VAT rates for transportation and service industries fall to 3 percent. More small businesses gain tax exemptions.

2015 - The State Council asks government agencies to cut fees, targeting elderly care, healthcare and higher education.

2016 - VAT reform expands to construction, consumer services, finance and real estate. Separately, employers contribute less to pensions.

2017 - 13-percent VAT bracket removed, cutting VAT for companies in the category (mainly agricultural businesses) to 11 percent. Exemptions were given to banks lending to small businesses. R&D deduction for tech startups is raised from 50 percent to 75 percent.

2018 - The threshold for personal income tax rises from 3,500 yuan to 5,000 yuan. Rates for two VAT brackets (17 percent and 11 percent) fall by one percentage point. Eligibility for certain VAT refunds extends to high-tech manufacturing.

2019 - 16- and 10-percent VAT rates were further lowered to 13- and 9- percent. Small businesses get additional VAT deductions. New personal income law introduces deductions for education, healthcare, housing and elder care.

2020 - Tax cuts and exemptions implemented in response to the pandemic.

2021 - R&D allowance raised from 75 percent to 100 percent.

2022 - Service industry eligible for VAT refunds. Corporate income tax for small businesses is halved. A 1,000 yuan per child deduction is offered to parents with children aged three or under.

Who benefited?

The reforms cut taxes by 8.8 trillion from 2013 to 2021, according to FENG Qiaobin, a researcher at the State Council development research center. They cover various taxes and made the tax code fairer, helping small businesses and supporting key industries.  But cutting taxes is just part of the reform. New taxes, such as the property tax, can help balance the economy.

Ten years ago, VAT reform helped the economy switch from manufacturing to service. The measures cut costs for companies. In the past two years fiscal policies were used to stimulate economic growth. Individuals, small businesses and high-tech companies have benefited.

From 2014 to 2021, annual per capita disposable personal income increased from 20,000 yuan to more than 35, 000 yuan. The number of small businesses doubled to about 20 million. Total R&D spending is expected to surpass 3 trillion yuan in 2022, three times in 2012.

CHEN Long of the Chinese Academy of Fiscal Science expects a lot to be done to improve the VAT and personal income tax. The tax codes can help in innovation, environmental protection, fighting poverty and digitization.

Economist WANG Zhen reckons policies should focus on helping small businesses cut costs and get funding. Individuals should take more measures to alleviate the burden of elderly care and stimulate consumption.