Accelerating Reform of the Fiscal and Tax Systems to Promote Sound and Rapid Development

From: English Edition of Qiushi Journal Updated: 2011-09-20 10:20
text size: T | T
Share:

 I. The important progress made in reform of the fiscal and tax systems during the Eleventh Five-Year Plan period

 We continuously deepened reform of the fiscal and taxation systems and made important progress during the Eleventh Five-Year Plan period.

 We constantly improved the public finance system to promote balanced regional development. The division of revenue and responsibility for expenditures of the different levels of government were overall stable. The system of transfer payments from the central government to local governments was further improved. The scale of general transfer payments was increasingly expanded and new special transfer payments were included and some old items eliminated. We adjusted the policy for transfer payments to ethnic minority areas, carried out trials of granting transfer payments to key functional ecological areas, and gradually expanded the scale of transfer payments to cities once dependent on now-depleted mineral resources. Transfer payments from the central government to local governments then become local revenue, which was used by local governments to cover budgetary expenditures to ensure people’s well-being and improve their lives, improve local access to basic public services and promote balanced regional development. We continued to deepen reform of fiscal systems at and below the provincial level and good progress was made in reform to place county finances directly under the management of provincial governments and township finances under the management of county governments.

 

    New houses built in an initiative to renovate dilapidated rural houses in Anle Township, Dafang County, Guizhou Province. As of October, 2010, more than 530,000 rural families have benefited from a project to renovate dilapidated houses in rural areas launched by Guizhou Province in 2008. The central government has provided 2.08 billion yuan in subsidies to support the initiative, while the Guizhou provincial government provided 2.691 billion yuan, municipal and county governments provided 2.06 billion yuan, and rural households raised 12.306 billion yuan. / Photo by Xinhua reporter Ou Dongqu

  The system of budgetary management was improved, greatly strengthening financial management. We set up the basic framework of a government budget system, improved the public finance budget, compiled budgets for all funding items of the central and local governments, promoted trials of a budget system for state-owned asset operations and began compilation of the budget for social insurance funds on a trial basis. Constant improvement was made in the system for classifying items of government revenue and expenditures. A thorough reform was carried out on the budget management system, gradually improving management of the budget compilation, strengthening management of budget implementation and accelerating efforts to make the budget process more open.

 We carried out reform of the tax system to further standardize the distribution between government and enterprises as well as between government and individuals. We completely rescinded the agricultural tax to truly reduce the burden on rural residents. We unified the rates of corporate income tax for domestic and foreign-funded enterprises to make the tax burden the same for all enterprises. We introduced a VAT on consumer products, improved the VAT system, and encouraged enterprises to expand investment and upgrade technology. The reform of taxes and fees on refined petroleum products was smoothly implemented, clarifying which are taxes and which are fees and establishing an effective permanent mechanism for funding highway construction in accordance with the law. We adjusted and improved the personal income tax system and sales tax system.

 In general, marked progress was made in reform of the fiscal and tax systems during the Eleventh Five-Year Plan period, guaranteeing the effectiveness of public finance and helping to ensure a good balance among reform, development and stability. At the same time, it should be noted that problems still exist in the current fiscal and tax systems in terms of the goal of developing systems that will promote transformation of the pattern of economic development. These problems are mainly manifested in the following aspects: The division of powers and responsibilities for expenditures are not clearly defined among different levels of government, and fiscal systems at and below the provincial level still need to be improved. Budgets need to be more comprehensive and transparent and financial management needs to be tightened. The structure of the tax system needs further improvement and development of local tax systems is still lagging behind. All these problems need to be resolved urgently by accelerating reform of the fiscal and tax systems.

 II. Major tasks for accelerating reform of the fiscal and tax systems during the Twelfth Five-Year Plan period

 The main objective of accelerating reform of the fiscal and tax systems is to improve the system of public finance.

 First, we need to improve the financial system to make the financial resources of governments more proportionate to their powers and promote equal access to basic public services throughout the country.

 We need to define a rational division of powers and responsibility for expenditures between the central and local governments. We are accelerating efforts to make the government more service-oriented and determining the proper balance between government regulation and market forces. Based on the results of these efforts, we need to define a rational division of powers and responsibility for expenditures between the central and local governments in line with laws and regulations, entitlement groups, cost efficiency and the need to increase support for lower level governments as well as gradually formulate legislation to clearly delineate the responsibilities of the central and local governments. We will start with the efforts in funding basic public services such as compulsory education, public health care, public security and the social safety net. In addition, we need to work out ways to clarify how revenue is to be divided between different levels of government in accordance with fundamentals such as the nature of different taxes and economic performance while carrying out reform of the tax system in order to stimulate enthusiasm of both the central and local governments. 

 We need to improve the system of transfer payments of the central government to local governments. We will make scientific and rational arrangements for the distribution of general transfer payments and special transfer payments to make the best use of their respective functions. We need to raise both the scale and proportion of general transfer payments. We will increase transfer payments to the central and western regions, first of all making up the difference between income and expenditures in restricted development zones and non-development zones while promoting development of the priority zones. We need to standardize special transfer payments by category and improve oversight and technical operations to make better use of transfer payment funds.

 We need to carry out reform of public finance at and below the provincial level. We need to standardize the distribution of revenue and responsibility for expenditures at and below the provincial level and move some powers and responsibility for expenditures to the next higher level of government where appropriate. We need to increase the responsibility of provincial governments to fund basic public services such as compulsory education, medical care and the social safety net and strengthen measures to ensure adequate funding related to the people’s well-being. Financial management needs to be reformed to place county finances directly under the management of provincial governments while correctly handling the relationship with the currently practiced administrative management system and other limits of economic management authority. The management of public finance for towns and townships needs to be improved and the reform to place township finances under the management of county governments needs to be carried out where appropriate for local conditions.

 We need to accelerate efforts to improve the mechanism for ensuring basic funding for county governments. The work of strengthening the ability of county governments to provide funding for basic public services needs to be given a higher priority. We need to meet the basic funding needs of county governments so they can pay wages, carry out normal operations and ensure the well-being of local residents. To do this, we need to establish and gradually improve a mechanism for granting awards and subsidies with stronger support from the central government and provincial budgets to set up the basics of a mechanism to ensure basic funding for county governments within the first three years of the Twelfth Five-Year Plan period and gradually strengthen the level of guaranteed funding toward the end of the Twelfth Five-Year Plan period.

 Second, we need to improve the system of budget compilation and the system for managing budget implementation to make the budgets more comprehensive and transparent.

 We need to improve the government budget system. The budget for public finance needs to be improved by enhancing the quality of government revenue and putting more emphasis on ensuring people’s well-being and improving their lives through increased spending on public services. We need to improve the budgetary control of government-established funds by making budget more standardized and transparent. The policy on budgetary revenue and expenditure for state capital operations needs to be improved by expanding the scope of central government state capital operations under budgetary control on a trial basis and accelerating moves to put the state capital operations of local governments under budgetary control. We need to standardize budgeting for social insurance funds by expanding the scope of social insurance funds subject to budget compilation and reporting. Extra-budgetary funds need to be eliminated by putting all government revenue under budgetary control.

 We need to improve the budgetary control system. Reform of the classification of government revenue and expenditures needs to be deepened, the system of standards for government expenditures needs to be improved, the basis on which the budget is compiled needs to be more solid, the budget compilation process needs to be further standardized and the budgets need to be more detailed. The management of budget implementation needs to be tightened, tax collection and management need to be improved to comply with the law and management of non-tax revenue needs to be improved to develop a standardized system of revenue management. We need to improve the way budget implementation is managed for all government agencies and departments and improve the responsibility system for budgetary expenditures to make the implementation of budgetary expenditures more balanced and effective. We need to deepen reform of the department budget system, the centralized treasury collection and payment system, and the government procurement system. We need to develop a sound system for managing budgetary performance.

 We need to develop a sound, comprehensive and standardized mechanism to ensure openness in the budget. The areas of openness in the budget process need to be expanded and budgets need to be more detailed on the basis of improved budget compilation. The principles and main areas of openness in the budget need to be defined, the system for disclosing information on the budget and the responsibility system for openness in the budget need to be improved to accelerate efforts to put openness on a legal footing and make it more standardized through revision of the Budget Law.

 Third, we need to gear tax reform toward scientific development.

 We need to improve the structure of the tax system to make the distribution of the tax burden fairer and standardize order in income distribution following a principle of simplifying the tax system, broadening the tax base, lowering tax rates and strengthening the collection and management of tax revenue.

 We need to strengthen the role of taxation in promoting transformation of the pattern of economic development. We need to pass more VAT legislation, steadily expand the scope of items subject to VAT and correspondingly reduce the tax on business, resolve the problem of the disconnect between tax policies on goods and labor through institutional means and gradually eliminate double taxation to promote development of the service industry on the basis of implementing and improving the VAT on consumer products. The scope and rate structure of sales taxes need to be adjusted to make them more rational and give more play to the role of sales tax in promoting energy conservation and emissions reduction and encouraging a healthier pattern of consumer spending. The corporate income tax system needs to be improved to encourage scientific and technological innovation. We need to carry out comprehensive reform of resource taxes to promote resource conservation and environmental protection. We need to start collecting an environmental protection tax to promote development of an environmentally friendly society.

 We need to strengthen the role of taxation in adjusting income distribution. We need to carry out reform of the individual income tax to gradually develop a sound individual income tax system in which tax is calculated on the basis of both aggregate and categorized incomes, thereby increasing the tax on high incomes. The sales tax system needs to be improved to strengthen its role in regulating income distribution. We need to continue changing fees into taxes following a principle of improving tax collection and standardizing fees, work out measures to reform the real estate tax and improve the property tax system. The funding mechanism for the social safety net needs to be improved to appropriately adjust the balance in funding of the social safety net in urban and rural areas.

 We need to gradually improve the tax system at the local government level. We need to grant provincial governments an appropriate amount of authority to administer tax policy and build up local sources of tax revenue within the unified tax policy of the central government. The central government regulates all powers concerning central and shared taxes, including legislation, the introduction or suspension of taxes, the adjustment of tax rates and items, and the relief or exemption of taxes. This is designed to protect the interests of the country as a whole. On the basis of national legislation, provincial governments are authorized to adjust tax rates, modify items, grant relief and offer exemptions in regard to standard local taxes and are allowed to pass detailed regulations or specific measures for implementation.

(Originally appeared in Qiushi Journal, Chinese edition, No. 22, 2010)


Note: /Author: Minister of Finance of the People’s Republic of China

 Related readings:  

 Ministry of Finance of the People’s Republic of China

 The Ministry of Finance, a component department of the State Council of the People’s Republic of China, is an important department that participates in, formulates and carries out macroeconomic regulatory policy. Its main responsibilities are: planning and carrying out the relevant principles and policies for tax collection, management of domestic government debt, administration of state assets and funds and government procurement. It is responsible for formulating the drafts for the annual central government budget and final accounting and for organizing budget implementation and reports to the National People’s Congress on the central and local budgets and their implementation on behalf of the State Council. The ministry also manages all central government tax revenue and public expenditures, extra budgetary funds and special public finance accounts of the central government, and expenditures from the central budget for the social safety net and related government funds. It arranges for and oversees central government expenditures for economic development, budgetary funding for central government investment items and use of central government funds for tapping the potential and upgrading of technology of enterprises. Finally, the ministry oversees the implementation of related finance and tax policy and related laws and regulations.

 Reform of China’s Fiscal and Tax Systems

 Beginning in 1978, reform of China’s fiscal and tax systems can be divided into two general stages. In the first stage, from 1978 to 1993, the main task of reform was to address the high concentration of financial authority and power under the planned economic system and the main method was to devolve authority and cede profits, with the local government being responsible for their own finances and the state practicing a contract responsibility system for the operation of state enterprises. The main task of the second stage, from 1994 to the present, is to set up a tax system compatible with a socialist market economic system. From 1994 on the country has practiced and constantly improved a system of fiscal administration characterized by the sharing of revenue and multi-tiered management and has actively worked to develop the public finance. Looking at the overall situation, China has now set up the basic framework for a public finance system compatible with development of China’s socialist market economy, resulting in a marked improvement in the strength of the country’s public finance. Total revenue in 2010 reached 8.308 trillion yuan, 1.6 times 2005 total revenue and an average annual increase of 21.3% during the Eleventh Five-Year Plan period.

Qiushi Journal | English Edition of Qiushi Jounrnal | Contact us | Subscription Copyright by Qiushi Journal, All rights reserved