Tax cuts poised to boost private businesses

Government makes renewed commitment to sector

Shu Wenbin is one of the millions of private business entrepreneurs in China set to benefit from large-scale tax cuts that take effect this month.

The 33-year-old general manager of Continental Interior Design and Construction in Beijing said he thinks the 2 trillion yuan ($299 billion) in cuts to taxes and fees, outlined in the Government Work Report on March 5, many of them targeted at small and micro businesses, will give his company a major boost.

"We will fully feel the strength of the tax reduction. This is a policy that benefits enterprises and the people as well. We will invest the money we save in the development of the company and its operations," he said.

The tax cuts are a result of the government's renewed commitment to the private sector, officials said.

President Xi Jinping declared his unswerving support for the sector at a symposium on private enterprise at the Great Hall of the People in Beijing on Nov 1.

"On the new journey to complete the building of a moderately prosperous society in all respects, (the) private sector should only grow stronger instead of being weakened," he told those attending the event.

Yet the scale of the cuts announced in the Government Work Report surprised many business observers.

The reductions represent more than 2 percent of China's GDP and more than the individual economies of countries such as Bangladesh, Vietnam, Egypt, Finland or Chile, according to their 2018 nominal GDP rankings by the International Monetary Fund.

The biggest change comes in valued added tax where the rate for manufacturing businesses is being reduced from 16 to 13 percent.

For most other sectors, including transportation and construction, the rate is being cut from 10 to 9 percent.

There are also major reductions in corporate income tax charged against profits. The rate for businesses with a turnover of less than 1 million yuan is being halved from 10 percent to 5 percent, while that for companies with a turnover of less than 3 million yuan is 10 percent minus 50,000 yuan.

On March 21, Premier Li Keqiang visited the Ministry of Finance and the State Taxation Administration to check on preparations for the introduction of the cuts.

Continental Interior Design and Construction, which was founded in 2008, employs 100 people and works mainly for corporate clients, will benefit from the fall in the VAT rate from 10 to 9 percent, and it will also be boosted by many of its suppliers enjoying a 3 percent cut.

Shu said he will invest the tax savings in three main areas: staff training, particularly in project management; the development of new products; and seeking new markets on the outskirts of Beijing and in South and Southwest China.

"The policies clearly demonstrate the government's commitment to the private sector and its willingness to help businesses like ours. We believe it is a very innovative approach," Shu added.

Russell Brown, managing partner of Lehman Brown, an accountancy firm in Beijing, and a former chairman of the British Chamber of Commerce in China, said tax rates on the Chinese mainland were now competitive with those in Hong Kong.

The corporate income tax rate in the special administrative region is 8.2 percent for companies with a turnover of less than HK$2 million ($255,000).

"These are now very competitive rates that should benefit the economy overall. They should also lead to less tax avoidance, and so there may not be a reduction in the overall tax take in the longer term," he said.

Zhu Tian, professor of economics at the China Europe International Business School in Shanghai, also believes the cuts will lead to less tax evasion.

"If you lower tax rates, companies are more likely to truthfully state their income. The VAT cut is the most significant because it is an important tax source in China and is hard to evade."

Debate about the importance of the private sector to the Chinese economy heightened at the end of last year.

President Xi made clear on a visit to Liaoning province in September that both State-owned enterprises and private businesses are vital.

He said it was wrong to disparage SOEs and that the private sector, which has been beset with funding difficulties and a lack of available finance, needed the government's "care and support".

Tax cuts for private businesses have been very much part of the government's agenda since 2012, when a pilot program to replace business tax with VAT was introduced in Shanghai.

The government also made reductions to VAT in May, cutting that which applied to the manufacturing sector from 17 to 16 percent and to the transportation and construction sectors from 11 to 10 percent.

According to the State Administration of Taxation, VAT cuts amounted to 270 billion yuan between May and December, with the manufacturing sector enjoying 35 percent of the benefits.

Fresh optimism among private businesses was also reflected in a survey released on April 9.

Some 71 percent of Chinese businesses interviewed in the CPA Australia Asia-Pacific Small Business Survey expect to grow this year, compared with the regional average of 68 percent.

The proportion was significantly higher than those for Singapore and Australia, where expansion of 60 percent and 48 percent, respectively, is expected by private businesses.

Zhu, at the China Europe International Business School, believes the VAT cuts will be a major boost to small businesses.

He said the reductions will lower companies' costs and increase demand for their products because they will be cheaper.

"There is both a demand and supply effect. Much of the reduction is going to be all profit for companies," he said.

Zhu said tax cuts are a very effective way of boosting the economy.

"Tax cuts are a supply-side stimulus. If the profits rise, you stimulate investment and you give companies more confidence in the future, so they invest," he added.

Stephen Roach, senior fellow at Yale University's Jackson Institute for Global Affairs, said the tax cuts should ease the pressure on small companies that faced funding difficulties at the end of last year after the government tightened credit to reduce debt in the economy.

Many small and medium-sized companies have been at the forefront of deleveraging pressures because of the squeeze on shadow banking in particular, he said.

Roach, a former Asia head of investment bank Morgan Stanley, did not think the cuts would be of huge benefit to high-technology businesses in the new economy, as they were already generating healthy cash flows.

Much of the new economy is growing very rapidly, generating huge increases in cash flow, so it does not rely on external funding and has less of a need for any stimulus, he said.

The cuts will not only benefit domestic companies but also those from overseas.

Massimo Bagnasco, managing partner of Progetto CMR (Beijing) Architectural Design Consultants, part of a leading Italian architectural company, said the reductions would provide a boost.

"It is definitely a positive action which will support small businesses," he said, adding that the VAT reduction would definitely help some companies.

Bagnasco said foreign companies in particular want to see improvements in other aspects of the business environment in China, not just tax cuts.

"One of the key issues for small and medium-sized enterprises, especially foreign ones, is better access to financing. Another major issue is ensuring reasonable payment terms. There is currently no consolidated legislation in China on late payment, which would alleviate many cash flow burdens SMEs have in China," he added.

Edward Tse, founder and CEO of management consultancy Gao Feng Advisory, said the cut in VAT in particular would ease the pressures on small businesses.

"It is a highly welcome policy change. It has to be seen as a very good signal from the government. The corporate sector has been making the case for many years that taxes should be substantially reduced, and the government has now responded," he said.

"Companies will either use the money they save to pay dividends or reinvest in their business, some of which will be in research and development, which can only be positive for the economy."

Charles-Edouard Bouee, CEO of management consultancy Roland Berger, also believes the tax cuts will ease some of the financial pressures that small businesses in China have been facing.

"I think they are significant and this is a good effort by the government," he said.

Bouee, who has written extensively about the Chinese economy, said that regardless of tax cuts, the country's private sector is now one of the most vibrant in the world.

"It is much more entrepreneurial than Europe and is much more similar to that in the United States. The world has changed a lot in the past 10 years, and what Chinese businesses have been able to do, whether they are in the tech sector or not, is adapt to new technology," he said.

Zhu Ning, deputy dean at the National Institute of Financial Research at Tsinghua University, said the tax cuts are addressing the slump in business confidence at the end of last year.

"Many companies - particularly export-oriented manufacturing businesses in Zhejiang province - found they were not making enough profit, and some of them closed down. This sector suddenly lost the confidence it had built up over decades," he said.

"The tax cuts represent a new incentive and I expect we are going to see this policy continue with cuts targeting new sectors such as artificial intelligence and high-end manufacturing."

For Shu, at Continental Interior Design and Construction, the cuts show the government is unequivocally on the side of small businesses.

"I am encouraged by the care and attention the Party and the government is offering the private sector. It only enhances my passion and confidence in running a business and developing innovation for the good of the nation," he said.

"Our company and myself, as an individual, are confident and willing to contribute to the great journey of this new era."

Chen Yingqun contributed to this story.