Tax Reform in China: Past Performance and Future Challenges*

By Peiyong, Gao | Public Finance and Management, October 1, 2008 | Go to article overview

Tax Reform in China: Past Performance and Future Challenges*


Peiyong, Gao, Public Finance and Management


ABSTRACT

China's current tax structure was introduced by its 1994 tax reform which holds the most important position in China's modern history on account of its scale and implications. Putting tax system building under the background of market economy, the reform has established a basic framework of China's tax system meeting the requirements of market economy. In its 13 years' operation, China's current tax system has played a significant role in China's economic and social development. However, some contradictions between current tax system and economic and social environments have arisen. As a result, China's current tax system is facing with the requirement of further reform. Under such a background, launching a new round of tax reform in a timely manner, according to the transformed economic and social environments, has already been included into China's 11th Five-year Plan. This paper discusses the accomplishments of the current tax system and the outstanding issues requiring further reform.

1. INTRODUCTION

The foundation of China's current tax structure was laid by the 1994 tax reform, which holds the most important position in China's modern history on account of its scale and implications. Given the background of the overall direction of government policy at the time, the reform established a basic framework of China's tax system for meeting the requirements of a market economy. During its operation in the past 13 years, China's current tax system has played a significant role and has achieved its primary goals of increasing government revenue, enhancing government's ability for macroeconomic control and regulation, equalizing regional economic and social development and accommodating the development structure of economic globalization.

With China's rapid economic and social development, however, some contradictions between current tax system and economic and social environments have arisen. As a result, China's current tax system is faced with the need for further reform. Against this background, China's 11th Five-year Plan includes the objective of launching a new round of tax reform in a timely manner, according to the transformed economic and social environment. The main goals of the new reform are: to reform export tax rebate system; to unify taxes for various types of enterprises; to convert the production-based VAT to a consumption-based VAT by including equipment investment into tax deduction scope; to improve consumption tax by properly enlarging the tax base; to revamp personal income tax and to introduce a new system of combined comprehensive taxable income; to implement reform on urban construction tax and fees and introduce unified and standard property tax on real estate as well as abolish relevant fees; to grant local governments proper rights of tax management under the pre-requisite of unified tax administration; and to create favorable conditions for the gradual realization of a unified urban and rural tax system.

Against this background, the purpose of this paper is to consider the accomplishments of the 1994 fiscal and tax reform and to discuss the reasons for the desirability of a new round of tax reform in China. The paper is organized as follows. Section 2 outlines the background and the main accomplishments of the 1994 tax reform. Section 3 discusses the key reasons for launching the new round of tax reforms in China. The basic thoughts and development of a new round of tax reform are outlined in Section 4. Section 5 considers the implications of the new round of tax reform for China's new stance of 'prudent' fiscal policy. Section 6 concludes with a summary of the main points.

2. BACKGROUND OF THE 1994 TAX REFORM IN CHINA

China's current tax system was introduced as a result of the 1994 industrial and commercial tax reform. At the 14th Conference of the National Congress of the Communist Party of China held in 1992, it was made clear for the first time that China's economic system reform was to establish the socialist market economic system in order to further realize the potential of the economy and to raise the level of productivity. …

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