n its tax reform program, China is generally reducing the proportion of indirect taxes while increasing that of direct taxes in fiscal revenue. Most observers believe that the government is more likely to cut the VAT rate. In a piece published on the WeChat account of the China Chief Economist Forum, Zhang Anyuan, chief economist at Dongxing Securities, argued that cutting the corporate income tax rate is better efficacy.
Lowering the VAT is nominally more beneficial to the manufacturing sector, but not be of much benefit to the high-tech sector, Zhang says. While labor-intensive industries like mining and construction have fewer tax deductions, and thus a huge VAT burden, the electronics industry, which enjoys immediate levies and refund preferential policies on software and integrated circuits, has almost zero VAT.
Lowering corporate income tax rates would push businesses to prioritize profitability above size, he notes. Some companies have expanded while ignoring profitability, resulting in high leverages, Zhang says. This is related to high corporate income tax rates. Given the tax’s base is adjusted to corporate profit, a lowered rate benefits profitable businesses.
There is more room for cutting corporate income tax rates than the VAT. Most of the economies that collect VAT have rates higher than 20 percent, so China’s 17 percent is relatively low. But China’s corporate income tax rate, at 25 percent, is relatively high internationally. Foreign-owned businesses pay more corporate income tax than VAT, so lowering corporate income tax would provide a friendlier tax environment and help retain foreign capital.
Zhang adds that by lowering corporate income tax rates, after-tax net profits would increase proportionally among all businesses. Investors would easily see equity returns and price-earning ratios improve for listed companies. This would boost optimism on the market.