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Suggestion on levy of consumption-related value-added tax
By Mi Jianguo
After the taxation system reform in 1994, China has basically established a taxation framework suitable to socialist market economy and a mechanism characterized by a steady growth of tax revenues. Practice proves that the reform is a success and has played an important role in promoting the sustainable, sound and fast development of national economy and in strengthening the macro-control ability of the state. From the perspective of development, however, the reform has its limits, some aspects failed to adapt to the demand of economic globalization and the new stage of the national economic development. Problems in the field of value-added taxes are predominant. The base of value-added tax is the incremental amount in all links in the sales of goods and labor services. Due to the difference in value composition of the tax base, value-added tax is classified into three types - production-related, income-related and consumption-related value-added taxes. When calculating the amount of tax according to the purchase tax deduction method, the production-related value-added tax does not allow deduction of taxable income from fixed assets, while the income-related value-added tax permits deduction of the taxable income on the basis of the depreciation allowance for fixed assets, and for the consumption-related value-added tax, a lump- sum may be deducted on the taxable income of the total value of fixed assets. The most noticeable feature of value-added tax is avoidance of double or multiple taxation. Of the three types of value-added taxes mentioned above, the consumption-related value-added tax could best reflect this feature. In the 110 countries where value-added tax is applied, the majority adopt the consumption-related value-added tax, and only a small number of countries, including China and Indonesia, apply the production-related value-added tax. The practice of our country in the past six years indicates that this production-related value-added tax has some disadvantages because it cannot give full part to the positive roles of value-added tax, such as broad tax base, simplified tax rate, fair taxation and close taxation links.
I. Main disadvantages of the production-related value-added tax
Firstly, it increases the tax burden on enterprises in the production sector, reduces their profitability, and has a big restrictive impact on the equipment replacement, technological renovation investment and production expansion of productive enterprises, particularly in the traditional industries. Even for enterprises in the high and new technology sector, enterprises whose investment in equipment accounts for a big proportion have to face taxation discrimination caused by production-related value-added tax in their initial stage of development. This drives up the cost of their maturity and development, and increases the investment risks. In the mode of production-related value-added tax, the reality is that the higher the organic capital composition and the larger the investment scale, the heavier the taxation burden would be, which, therefore, makes it difficult to give full part to the role of taxation in encouraging investment and stimulating economic growth.
Secondly, the taxation means of "control tax in terms of invoice" make taxation even more difficult; the problem of tax evasion and fraud by means of special invoice of value-added tax is serious, hard to guard against and has led to a massive loss of tax revenues.
Thirdly, the main body and role of taxpayers are limited. As for the main body, ordinary taxpayers as defined in the current tax law do not cover unexceptionally all legal and natural persons who shall pay tax. In terms of their role, the collection of value-added tax has not yet extended to such sectors as service and agriculture, leaving a loose link in the collection of value-added tax and making it difficult to bring the role of value-added tax into full play. This restricts its regulatory role in resources allocation and income distribution.
Fourthly, the current practice cannot effectively reflect the principle of fair taxation and equal competition. Under the system of production-related value-added tax, the tax burden on labor-intensive enterprises is lighter than technology-intensive enterprises; in regions where the metallurgical, mining and heavy industries make up a large proportion, the tax burden is remarkably heavier than regions where the processing industry is developed. In China, consumption-related value-added tax has been actually applied to enterprises with foreign investment; different tax burdens on domestic enterprises and foreign-funded enterprises are not conducive to fair competition among enterprises.
Lastly, it does not meet the needs of international competition after China's entry into the World Trade Organization. In countries where a valued-added tax system is adopted, the majority of them prefer to the consumption-related value-added tax, allowing a lump-sum deduction of tax on the fixed assets purchased. Compared with production-related value-added tax, the tax burden is lower (by about one-third). Therefore, enterprises in countries applying the production-related value-added tax are in a disadvantageous position in global competition. As China is about to cross the threshold of the WTO, it is imperative to dovetail the current taxation system with international practice.
For the above-mentioned reasons, we must promote what is beneficial and abolish what is harmful in the current tax collection system, and step up the shift from production-related value-added tax to consumption-related value-added tax.
II. Matured conditions for consumption-related value-added tax
At present, conditions are by large matured for the shift of value-added tax. Firstly, tax revenue is increasing at present, and the value-added tax is on a fast rise. This growing trend is expected to continue, and a temporary drop in tax revenue, due to the shift of value-added tax, may not likely affect the fiscal balance. Secondly, the shift of value-added tax is not expected to result in a significant decline in tax revenue. Although value-added tax from State-owned enterprises is likely to slide a bit temporarily, the shift will help reduce their tax burden and increase their profits, which would in turn drive up income tax. Thirdly, with the expiration of the initial inventory deduction policies and the adoption of a new value-added tax system, the revenue of value-added tax is expected to increase. Fourthly, Given better administration over tax collection and improvement in the taxation system, particularly the gradual implementation of the "golden tax project", the total revenue of value-added tax and other taxes will escalate moderately. Fifthly, following the change in the value-added tax modes the investment environment will become more favorable, the effect of value-added tax in stimulating investment will help boost economic prosperity, and an expanded economic scale will in turn push the increase of tax revenue. Sixthly, the macro-economy will turn for the better, the GDP growth will also bring about more tax revenue. Lastly, the Ministry of Finance and the State Administration of Taxation have jointly made extensive investigation and study on the change of modes of value-added tax; and the media have responded positively. Therefore, it can be said that all preparations for the change have been completed by and large.
III. Immediate Start and Step-by-Step Implementation
The shift of value-added tax mode is inevitable, the earlier the better. A good beginning is half done. But this cannot be done at one stroke. It should be better to shift the mode first and then expand its scope. As the first step, based on the present scope of value-added tax, efforts should be stepped up to shift the mode of production-related value-added tax to that of consumption-related value-added tax. The advantage of this move is that it has little impact on the interests and benefits of various localities, so it is not necessary to readjust the current revenue-sharing relations between the central and local governments. As the second step, the value-added tax is extended to all sectors, including the service, agriculture, transport and building industries. When all taxpayers are included, readjustment can be made in the relations of revenue distribution between the central and local governments.
Research Dept. of Macro-Economy
September 2000
