April 20, 2017 6:20 am JST

China greasing economy with $55bn in tax breaks

Party leadership seemingly courting lower income groups ahead of fall congress

ISSAKU HARADA, Nikkei staff writer

BEIJING -- China's State Council on Wednesday approved 380 billion yuan ($55.1 billion) in tax relief that will mainly favor farmers and small businesses in a move that is seen as both economic and political.

The second large-scale tax cut to follow last year's comes as China's economy is forecast to slow down in the latter half of 2017, during which the Communist Party will convene its 19th National Congress and reshuffle top leadership.

China will modify its value-added tax this July by removing the 13% bracket while retaining the 6%, 11% and 17% tiers. The 13% rate currently applies to farm products and natural gas, but they will move to the 11% category. Farmers as well as households that purchase rice and vegetables will likely benefit from this change.

For smaller companies, those that pay 300,000 yuan or less in annual taxable revenue qualify for preferential tax treatment. The ceiling will be lifted to 500,000 yuan. Furthermore, small businesses and startups will be allowed to deduct 75% of research and development costs, up from 50%. These tax breaks will remain in effect until the end of 2019.

The Chinese government enacted about 500 billion yuan worth of corporate tax cuts in 2016. Helped also by a surge in infrastructure spending, the real economy grew 6.9% during the January-March period this year, marking the second quarter of economic acceleration. However, the People's Bank of China, the country's central bank, has been gradually raising market interest rates in order to rein in the real estate bubble.

Many analysts believe the domestic economy will slow down during the second half of the year in the face of monetary tightening. Because infrastructure largesse has been said to fuel bubbles and debt addiction, the one-party state has turned to hefty tax cuts to stimulate the economy.

The Communist leadership is also apparently seeking to curry public favor ahead of the twice-a-decade congress. The current economic growth has been led by infrastructure investment and the real estate market, which have overwhelmingly benefited large state-owned enterprises and the affluent.

Meanwhile, the perceived recovery is negligible among the general public. Some are even complaining that the high costs of condominiums have priced them out of the housing market.

This round of tax reductions could be seen as a form of pork-barrel politicking, since much of the windfall will go to farmers, small businesses and others with relatively lower incomes. The biggest focus of the leadership under President Xi Jinping now is to maintain social stability heading into this fall's National Congress. Appeasing public grievances would go hand-in-hand with those aims.

A proposal to eliminate the 17% value-added tax for manufacturers had floated within central government circles. The purpose would have been to boost those companies' competitive advantage on the global stage, but that idea was shelved, possibly due in part to the added fiscal liabilities. This suggests the party leadership is prioritizing winning over the general public over supporting manufacturers with overseas exposures.  

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