Historical development

During the past 40 years of reform, China's tax system has gone through a few major adjustments, including establishing a compound tax system that adapts to the regulation requirements of a socialist market economy.

During the past 40 years of reform and opening up, the process of reform of China’s tax system can be divided into three periods: the planned commodity economy period (1978-1993), the initial period of socialist market economy (1994-2000), and the perfecting stage of socialist market economy (2001 till now).

I. During the planned commodity economy period (1978-1993)

Taxation reform during this period includes the establishment of foreign-related tax systems, implementation of the two-step program concerning the substitution of tax payments for profit delivery, and the reform of industrial and commercial tax systems in 1984.

From 1979 to 1981, China successively enacted Income Tax Law on Chinese-Foreign Equity Joint Ventures, Individual Income Tax Law, and Income Tax Law on Foreign Enterprise; continually levied consolidated industrial and commercial tax, urban real estate tax, and vehicle and vessel license plate tax on Chinese-foreign joint ventures and foreign enterprises, developed a generally applicable foreign-related tax system, and carried out a series of preferential tax policies.   

Since 1983, in accordance with the national conditions of China, a nation-wide trial implementation of substitution of tax payment for profit delivery was carried out in State-owned enterprises, transforming the submission of profit to the State, a system followed for more than 30 years since the founding of new China, to paying enterprise income tax, which marked a historical turning point of the relations of distribution between the State and enterprises.

The following program of substitution of tax payment for profit delivery in 1984 and the reform of industrial and commercial tax system were the largest taxation reforms since China adopted the reform and opening up policy.

In conclusion, a multi-tax, multi-link, and multi-tiered compound tax system was formed in China by restoring some taxes and starting a few new ones. Meanwhile, more attention had been paid to the economic leveraging of taxation. Together they accelerated China’s opening-up and promoted its economic development.  

II. During the initial period of socialist market economy

To adapt to the requirements of the market economy, China launched industrial and commercial tax system reform in 1994, which was the largest in scale, widest in scope, and the most profound in contents, and the most strictly implemented since the founding of new China.

An overall reform on turnover tax was carried out. With implementation of standardized value-added tax at its core, consumption tax and business tax were added accordingly, forming a new turnover tax system. The former industrial and commercial consolidated tax levied on foreign enterprises was replaced by a new turnover tax system.

Implementing uniform enterprise income tax on domestic enterprises. The former State-owned enterprise income tax, State-owned enterprise adjustment tax, collective enterprise income tax and private enterprise income tax were repealed. Meanwhile, the income contract system stipulating that State-owned enterprises must pay income tax was also abolished. 

Unifying individual income tax. The changes included repealing the former individual income adjustment tax and income tax of urban and rural self-employed industrial and commercial households, and applying the uniform, amended Individual Income Tax Law on individual income and income of self-employed industrial and commercial households derived from production and business operation.

Adjusting, repealing or consolidating taxes, and starting new types of taxes. For example, adjusting resource tax, urban maintenance and construction tax, and urban land usage tax; repealing fair transaction tax, livestock transaction tax, special fuel oil tax, bonus tax, and salary adjustment tax; starting new taxes such as land value increment tax and a stamp duty on securities transactions. Salt tax was incorporated into resource tax and special consumption tax was incorporated into consumption tax.

The industrial and commercial taxation reform in 1994 has established the basic frame of China’s tax system in the market economy. After the reform, the number of tax category of China’s tax system was reduced from 37 to 23, realizing the preliminary goal of making the tax system simplified, standardized, effective and unified.