New tax cuts nurture small business growth

Guan Guifeng paid 700 yuan (114 U.S. dollars) in taxes on her Tianjin-based communications equipment business in July, but starting Aug. 1, that burden will be a thing of the past.

Guan's business is among some 6 million small firms whose tax burdens will be significantly eased since the State Council, China's cabinet, announced in late July a move to suspend value-added tax (VAT) and turnover tax for businesses with monthly revenues below 20,000 yuan, starting from Aug. 1.

The monthly revenue of Guan's Tianjin Yingtai Communication Equipment Sale Co., Ltd, stands at around 15,000 yuan. Prior to the tax cuts, given tax rates ranging from 5 to 7 percent, Guan paid about 1,000 yuan, a quarter of her profits, in VAT and turnover taxes.

The tax cuts were rolled out in an effort to bolster slowing economic growth, and China's Ministry of Finance estimates that the cuts will save businesses 30 billion yuan this year.

While analysts believe the policy will have more of a symbolic significance than a material impact as the 20,000 yuan revenue threshold only applies to a limited number of companies, the move will surely send ripples through a part of the economy that employs tens of millions of people.

According to statistics from the Ministry of Industry and Information Technology, 99 percent of companies registered in China are small and medium enterprises (SMEs) and they produce up to 80 percent of urban jobs.

These companies also make up 60 percent of China's economic output. Easing their tax burden is part of what many call a "micro stimulus" plan that is more targeted and efficient than the massive liquidity injection unleashed in the wake of the global financial crisis in 2008.

China had previously raised the tax threshold for small business owners, but the country still lacks tax incentives for promising start-ups.

"Small businesses add vitality to the market, but without sufficient policy support, they could be weighed down by a cash squeeze that eventually threatens their very survival," said Liu Gang, vice dean of the Binhai Development Institute of Nankai University in Tianjin.

Liu added that the tax cuts could be the first step toward a broader set of policies to nurse the growth of start-ups and small businesses.

The country's thriving micro and small enterprises will greatly boost growth and economic restructuring, Premier Li Keqiang said at a workshop in early July in south China's Guangxi Zhuang Autonomous Region.

However, many business owners currently benefitting from the tax cuts have expressed concerns that if their businesses expand, they may have to shoulder a monthly tax burden of at least 1,500 yuan once their monthly revenue tops 20,000 yuan.

To address such concerns, Yang Zhiyong, a researcher with the National Academy of Economic Strategy at the Chinese Academy of Social Sciences, suggested that going forward, the policy could be revised to only tax the amount exceeding the 20,000 yuan threshold.

Such a change could extend the tax relief through continuous business expansion without hitting small companies with a sudden shift to heavy taxes, Yang added.

"From a long-term perspective, policymakers should build up a comprehensive policy package to aid the growth of micro and small enterprises," Yang said.