Development of China's Tax System
1 Development of China's Tax System
Taxes provide the most major source of revenue for the Chinese government. Taxation is an important economic tool for China to help improve its macroeconomic regulation, and thus has a great impact on the economic and social development of China.
Since the establishment of the People's Republic of China in 1949 (PRC, or New China), China's tax system experienced three stages of reform:
- Stage 1, 1949–1957: China's economy went through a period of recovery, socialism underwent a transformation, and New China's tax system was established and subsequently consolidated.
- Stage 2, 1958 to end-1978: This period ended on the eve of the Third Plenary Session of the 11th Central Committee of the Communist Party of China (CCCPC). The tax system underwent a tortuous development, having been affected by the events of the Great Leap Forward and Three Years of Natural Disasters that struck the country. This was also the period of the Cultural Revolution (1966–1976).
- Stage 3, end-1978 to 1982: This period started with the Third Plenary Session of the 11th CCCPC, which marked the start of reforms and China's opening up to the rest of the world. Tax reforms were pushed through and a strong tax system continued to be established.
During the three stages, five important tax reforms were adopted:
- First reform, 1950: This took place at the beginning of the establishment of New China. A new tax system was set up based on the experiences built on liberalizing the old tax system and streamlining the old tax system.
- Second reform, 1958: The key changes comprised simplifying the tax system to cater to the needs of the new environment arising from the transformation of socialism within China and the reform of the economic administration system.
- Third reform, 1973: This entailed further simplification of the tax system, following the Cultural Revolution.
- Fourth reform, 1984: Main components included the levy of tax on the profits of state-owned enterprises (SOEs) and the reform of the entire industrial and commercial tax system in response to the needs of the newly developed planned socialist market economic system.
- Fifth reform, 1994: Yet again, the entire industrial and commercial tax system was reformed, as result of the establishment of the socialist market economy.
Before Tax Reforms and Before China's Opening Up to the Outside World, 1949–1978
During these 29 years, China's tax system traveled a bumpy road. After its establishment, New China immediately set about to form a new tax system. This was of such great importance to the CPC and the Administrative Council of the Central People's Government, that the Vice Premier of the Administrative Council, Chen Yun, was appointed to oversee the reforms. On January 30, 1950, the Administrative Council promulgated the National Tax Policy Implementation Rules, specifying 14 kinds of taxes to be levied across the country: 1) Goods Tax, 2) Industrial and Commercial Sector Tax (including Business Tax and Income Tax), 3) Salt Tax, 4) Customs Duty, 5) Salary Income Tax, 6) Saving Interest Income Tax, 7) Stamp Tax, 8) Inheritance Tax, 9) Transaction Tax, 10) Slaughter Tax, 11) House Property Tax, 12) Land Property Tax, 13) Special Consumption Tax, and 14) License Use Tax.
Other taxes—namely, the Agriculture Tax, Animal Husbandry Tax, and Deed Tax—were to be levied after the provinces, municipalities, and large administrative regions had established the method of levy, which was to be based on tradition. These methods required approval from the large administrative regions or the central government.
During implementation, some adjustments were made to the tax system. For example, the House Property Tax and Land Property Tax were integrated into Urban Realty Tax; the Special Consumption Tax was consolidated into the new Cultural Entertainment Tax; new taxes such as the Business Tax, Deed Tax, and Vessel Tonnage Tax were imposed; the Commodity Circulation Tax was established on a trial basis; and the Agriculture Tax was legislated by the Standing Committee of the National People's Congress (NPC). The Salary Income Tax and Inheritance Tax were not levied at that time.
During 1950–1957, with the prevailing political and economic environment as the backdrop, and the revamp of old tax system, China set up a compound tax system, which featured multiple taxes and multi-collection. This new tax system played a crucial role in 1) increasing China's revenue, 2) stabilizing the economy, 3) ensuring the victory of the revolutionary war, 4) guaranteeing China's financial and economic recovery, 5) promoting the recovery and development of the national economy, 6) supporting the transformation of the agricultural sector, the handicraft industry, and the capitalist industrial and commercial sector, and 7) establishing, consolidating, and developing the socialist economy.
The 1958 tax reform was the second large-scale tax reform since the formation of New China. It was aimed at simplifying the industrial and commercial tax system through the adoption of industrial and commercial consolidated taxes on a trial basis. The reform also saw the “integration of profit remittance and tax payment” by urban SOEs and the “fiscal contract” for the people's commune in the countryside. By this time, there were nine taxes under the industrial and commercial tax system, namely, the 1) Industrial and Commercial Consolidated Tax, 2) Industrial and Commercial Income Tax, 3) Salt Tax, 4) Slaughter Tax, 5) Interest Income Tax (stopped in 1959), 6) Urban Realty Tax, 7) Vehicle and Vessel Plate Usage Tax, 8) Cultural Entertainment Tax (halted in 1966), and 9) Livestock Transaction Tax (no nationally unified legislation). Other taxes adopted under this reform were the Agriculture Tax, Animal Husbandry Tax, Deed Tax (suspended from the mid-1950s), Customs Duty, and Vessel Tonnage Tax.
In 1962, to support the improvement of the administration of the market, the Market Transaction Tax was introduced; however, it was fully abolished since 1966.
During the Cultural Revolution (1966–1976), the simplified tax system was criticized as being a “complicated philosophy.” In 1973, China began the third large-scale tax reform since the formation of New China, focusing on simplifying further the industrial and commercial tax system. By that time, China had seven taxes, namely, the 1) Industrial and Commercial Tax (the Salt Tax was integrated into this tax in name but in reality it was levied based on the previous method); 2) Industrial and Commercial Income Tax; 3) Urban Realty Tax; 4) Vehicle and Vessel Plate Usage Tax; 5) Slaughter Tax; 6) Industrial and Commercial Consolidated Tax; and 7) Market Transaction Tax. The SOEs were subject to only one tax—the Industrial and Commercial Tax—while the collective enterprises were subject to both that and the Industrial and Commercial Income Tax. The Urban Realty Tax, Vehicle and Vessel Plate Usage Tax, and Slaughter Tax were applicable to only on individuals and minority units. The Industrial and Commercial Consolidated Tax was levied on only foreign investors. Other taxes were the Agriculture Tax, Animal Husbandry Tax, Deed Tax, Customs Duty (existing only nominally), and the Vessel Tonnage Tax.
In summary, during the 20 years from the privatization of productive materials under the transformation of socialism in China to 1978, the establishment of China's tax system was disrupted due to the beliefs of the leftists and the influence of the former Soviet Union's economic theory and fiscal system. The reforms underwent a one-sided simplification. At the same time, tax organizations had been split into smaller organizations, and large number of staff had been forced to leave the tax offices. The result was a decrease in the number of taxes and the tax system becoming less unwieldy, which led to the decline in the role of taxation in China's economy, and its social, political, and economic life.
After the Third Plenary Session of the 11th CCCPC (the session started at the end of 1978), the socialist revolution and formation of New China entered a new era. And so did China's tax reforms. With the continuous development of China's politics and economy and the gradual deepening of its reform, the reform of its tax system was forging ahead nonstop, achieving a series of successes along the way.
In terms of timing and achievements, the progress of China's tax reforms over the past 20 years or so may be roughly divided into three stages:
- Stage 1: From the end of the 1970s to the early 1980s.
- Stage 2: From the mid-1980s to the early 1990s.
- Stage 3: From the mid-1990s.
At the Start of Tax Reforms to China's Opening Up to the Rest of the World, 1978–1982
During end-1978 to 1982, the objective of economic reforms was made clear at the Third Plenary Session of the 11th CCCPC. In addition, the 12th CCCPC called for the speeding up of the implementation of these reforms; the steps were listed in the Seventh Five-Year Plan (1986–1990). These plenary sessions and the decisions taken during them were crucial with regard to the supervision of the reform of China's economy and tax system.
This period saw the establishment of a reformed tax system in China. It laid a solid foundation, upon which later reforms could be formulated and built. This period also saw China's tax reform achieve its first breakthrough since the reforms were undertaken and China opened up to the rest of the world.
The tax and financial departments carried out fully the principles and policies formulated at the Third Plenary Session of the 11th CCCPC. The departments also painstakingly gathered facts, carefully summarized the experience and lessons learnt from previous tax reforms since the formation of New China, corrected the negative perception toward taxes, introduced guidelines based on national conditions, and conducted their duties with a focus on the economic well-being of the country, and in the process, increased the contribution of tax to China's revenue. Consequently, taxation became an economic leverage for the setting up of modern socialism.
In terms of the organization of tax administration, tax offices were re-established at all levels and staff was increased. By the end of 1982, there were tax offices at every level across China and the status of the tax offices at the provincial level was upgraded. The local government and these provincial tax offices oversaw the lower-level tax offices. The number of total tax staff in China was over 280,000.
From late-1978 to early 1979, the tax and financial departments conducted a study of China's tax reforms. The study recommended and implemented several new taxes, including taxes on SOEs, the Individual Income Tax and imposing taxes on foreign investment as a first step toward opening up the country to the rest of the world.
From September 1980 to December 1981, the 5th National People's Congress (NPC) passed and promulgated the 1) Income Tax Law on Enterprises with Sino-Foreign Investment; 2) Individual Income Tax Law; and 3) the Income Tax Law on Foreign Enterprises. At the same time, the State Council made clear that the Industrial and Commercial Consolidated Tax, Urban Realty Tax and Vehicle and Vessel Plate Usage Tax would be imposed on Sino-foreign joint ventures, foreign enterprises, and foreigners. Thus, a formal foreign tax system was set up, which achieved its objective of earning foreign funds at the start of foreign economic and technical cooperation.
The tax and financial departments also conducted enormous research into the reform of the industrial and commercial tax system and the profit distribution system of the SOEs. It also carried out experimental projects in some of these areas. Based on these, the Ministry of Finance submitted to the State Council in August 1981 the Report on the Ideas of Reforming the Industrial and Commercial Tax System. Their recommendations received approval almost immediately.
In November 1982, the State Council submitted to the Fifth Session of the 5th NPC the Report on the Sixth Five-Year Plan, laying out the task of tax reform over the following three years. This plan was passed at the session.
During that period, the State Council approved the passing of the Fuel Tax, and promulgated the Provisional Regulations on Livestock Transactions Tax.
The Period of Full Reform and China's Opening Up to the Rest of the World, 1983–1991
In 1983–1991, there was a significant breakthrough with the development of socialist economic theory. The theory encompassed developing a planned socialist market economy, using the law of value, employing taxation as a good economic tool, revitalizing the economy, and improving macro regulation. With regard to ownership, the theory advocated the separation of the right of ownership from the right of management. It also confirmed the necessity of the collective economy, individual household economy, and private economy. All of these were written into the resolutions of the Third Plenary Session of the 12th CCCPC in 1984 under economic reforms, the documents of the 13th CCCPC in 1987, and the Constitutional Amendment that was passed at the First Session of the 8th NPC in 1988, which paved the way for the implementation of a strong theoretical tool, and legal and policy changes for tax reforms.
During this period, tax reform was carried out fully. China achieved a second breakthrough—since the time it decided to undertake reforms and open up to the rest of the world—in its efforts toward tax reforms.
In 1983, as an important measure of enterprise reform and city economic reform, the State Council implemented a tax on the profit of SOEs. Over the past 30 years or so, SOEs had been remitting their profits to the state. But with the new enterprise tax, SOEs had to pay tax on the profits they earned. This was a historic turn in the distribution of revenue between the state and SOEs.
To speed up the city economic reforms, upon the approval from the Sixth Session of the 6th NPC and its Standing Committee, the State Council implemented the second phase of the levy of tax on SOE profits (which replaced the remitting of SOE profits to the government) and instituted the industrial and commercial tax system reform from October 1984, promulgating the administrative regulations on levying the State-Owned Enterprise Income Tax, State-Owned Enterprise Regulation Tax, Product Tax, Value-Added Tax, Business Tax, Salt Tax, and Resource Tax.
Later on, the State Council promulgated the administrative regulations for levying the Collective Enterprise Income Tax; Private Enterprise Income Tax; City, Countryside Industrial and Commercial, Household, Enterprise Income Tax; Individual Income Regulation Tax; City Maintenance and Construction Tax; State-Owned Enterprise Bonus Tax (promulgated in 1984 and revised in 1985); Collective Enterprise Bonus Tax; Institutional Unit Bonus Tax; State-Owned Enterprise Wage Regulation Tax; Fixed Asset Investment Orientation Regulation Tax (predecessor of the Construction Tax levied in 1983); House Property Tax;Vehicle and Vessel Usage Tax; City and Township Land Use Tax; Stamp Tax; and Banquet Tax; and also the Special Consumption Tax.
In 1991, the Fourth Session of the 7th NPC integrated the Income Tax Law on Enterprises with Sino-Foreign Investment and the Income Tax Law on Foreign Enterprises into the Income Tax Law on Enterprises with Foreign Investment and Foreign Enterprises.
Up to then, there were 32 types of taxes under the industrial and commercial tax system of China, namely, the 1) Product Tax, 2) VAT, 3) Business Tax, 4) Resource Tax, 5) Salt Tax, 6) City and Township Land Use Tax, 7) State Enterprise Income Tax, 8) State Enterprise Regulation Tax, 9) Collective Enterprise Income Tax, 10) Private Enterprise Income Tax, 11) City and Countryside Individual Industrial and Commercial Household Income Tax, 12) Individual Income Regulation Tax, 13) State Enterprise Bonus Tax, 14) Collective Enterprise Bonus Tax, 15) Institutional Unit Bonus Tax, 16) State Enterprise Wage Regulation Tax, 17) Fixed Asset Investment Orientation Regulation Tax, 18) City Maintenance and Construction Tax, 19) Fuel Tax, 20) Banquet Tax, 21) Special Consumption Tax, 22) House Property Tax, 23) Vehicle and Vessel Usage Tax, 24) Stamp Tax, 25) Slaughter Tax, 26) Market Transaction Tax, 27) Livestock Transaction Tax, 28) Income Tax on Enterprises with Foreign Investment and Foreign Enterprises, 29) Individual Income Tax, 30) Industrial and Commercial Consolidated Tax, 31) City Realty Tax, and the 32) Vehicle and Vessel Plate Usage Tax. Other taxes included the Agriculture Tax, Animal Husbandry Tax, Deed Tax, Land Occupation Tax (levied in 1987 to restrict the use of farmland), and Customs Duty.
In 1978–1991, with the development of the economy and the deepening of the reforms, China made a full study of the progress of the reform of the industrial and commercial tax system—the reform was deepening progressively and huge strides were made. By this time, a new tax system with different internal and external treatments was established, and with turnover tax and income tax at its core. The tax system also had other taxes complementing it, which catered to the economic environment prevailing at the start of China's economic reforms. The tax reforms were implemented fully, resulting in tax revenue increasing steadily and the role of taxation as a macroeconomic tool becoming increasingly obvious. It played an active role in facilitating the state's economic policy, through regulation of production, distribution, and consumption.
Tax Reforms of 1994
After 1992, China's reform and open-door policy entered a new historic stage; tax reforms also entered a golden period during which it achieved a third breakthrough.
In the spring of 1992, Deng Xiaoping visited southern China and delivered an important speech. Following that ground-breaking speech, the political bureau of the CPC held a plenary meeting. It was subsequently decided that the CPC and the State Council would speed up economic reforms and the continuing implementation of the country's open-door policy to help the economic development of the country. The financial and tax departments followed this lead and started to quicken its tax reforms.
In December 1992, the General Secretary of the CPC, Jiang Zemin, put forward the strategic objective of building up the socialist market economy, which included tax reforms.
In the spring of 1993, Mr Jiang chaired several meetings of the central financial and economics team, studying the ideas for tax reform forwarded by the tax and financial departments. Mr Jiang put forward the guidelines and basic principles for such reforms and appointed Zhu Rong ji, standing member of the political bureau of the CCPC and Vice Premier of the State Council, to lead the implementation of the reforms.
In June 1993, the CCPC and the State Council made a series of important decisions on improving the regulation of the macroeconomy, one of which was to speed up the tax reforms.
Between August and September of that same year, the Standing Committee of the State Council and the Standing Committee of the political bureau of the CPCC discussed and approved the schemes for industrial and commercial tax reforms. In November 1993, the Third Plenary Session of the 14th CCCPC passed a resolution on the various issues concerning the building of the socialist market economy. This resolution determined the basic principles and key contents of the tax reforms. By end-December 1993, relevant laws and administrative regulations were promulgated, to take effect across the country in 1994.
The industrial and commercial tax reforms of 1994 encompassed the following objectives:
- Fully reforming the turnover tax system by adopting the VAT as the core and supplemented with the Consumption Tax and Business Tax, which was consolidated for both domestic and foreign enterprises.
- Reforming the old enterprise income tax system by integrating the old multi-income taxes on SOEs, collective enterprises, and private enterprises into the Enterprise Income Tax.
- Reforming the Individual Income Tax by merging the old Individual Income Tax on Foreigners, Individual Income Regulation Tax on Chinese, and the Income Tax on Individual Households into the Individual Income Tax.
- Modifying the Resource Tax (by expanding its scope), Special Purpose Tax, Property Tax, Behavioral Tax, implementing the Land Appreciation Tax, abolishing the Salt Tax, Bonus Tax and Market Transaction Tax, decentralizing the Slaughter Tax and Banquet Tax to the provincial governments, and adopting the Inheritance Tax and Securities Exchange Tax (these two taxes were legislated).
The tax reform of 1994 was the largest tax reform in scale, most comprehensive in scope, and most thorough in more than 50 years since the formation of New China. The reforms were formulated based on the implementation over a dozen years, after many years of theoretical study and trials, after studying the successful experience of foreign countries and the applicability to China's situation. The reforms have proven to be a success. With some fine-tuning in recent years, China has basically set up a tax system that meets the needs of its socialist market economy. This tax system plays an important role in ensuring revenue, strengthening the macroeconomy regulation and control, having further reforms, and the expansion and promotion of the country's economic and social development.