Accelerating the Development of the Fiscal and Tax Systems to Promote Scientific Development

From: English Edition of Qiushi Journal Updated: 2013-05-28 18:49
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The report to the 18th National Congress of the CPC stressed the need to deepen economic reforms across the board, regarding this as a matter of underlying strategic significance. On this basis, the report outlined specific requirements with regard to accelerating the reform of China’s fiscal and tax systems. Therefore, in keeping with the plans set out by the CPC Central Committee, we need to deepen fiscal and tax reforms and work faster to develop fiscal and tax systems that are geared towards scientific development, so as to make greater contributions to China’s efforts to complete the building of a moderately prosperous society in all respects.

Tax officials pay a fact-finding visit to the Qingdao Qindao Electric Appliance Company on November 13, 2012. During the visit, tax officials learned about the company’s operations and met with members of its accounting department to explain the government’s tax policies./ Xinhua (Photo by Ning Youpeng)

I. Achievements in recent years

First, distribution relationships between different levels of government have been further standardized. As a result, the central government is now better able to conduct macro-regulation, and local governments are in a better position to provide basic public services. In order to meet requirements for reform and development, we have made appropriate adjustments to the division of revenue and expenditure responsibilities between different levels of government whilst maintaining overall stability. The system of transfer payments from the central government to local governments has been improved constantly, with the scale of general transfer payments having been expanded. This has helped to promote equal access to basic public services as well as balanced regional development. The reform of fiscal systems below the provincial level has been deepened. As a part of these reforms, we have taken steps to establish mechanisms to guarantee basic funding for county governments. In addition, financial management has also been reformed to place county finances directly under the management of provincial governments and township finances under the management of county governments. 

Second, notable progress has been made in the development of the public finance system, putting us in a stronger position to guarantee equal access to basic public services and build development priority zones. Expenditure in public services has been increased, with the focus being placed on regions with special difficulties, local areas, and the general public. This has significantly boosted the formation of our basic public service system, ensuring that the public well-being can be safeguarded and improved. In addition, our public education system has been improved, and a public employment service system geared towards all working people has been basically put in place. The coverage of social safety nets has been extended from urban areas to rural areas and from working people to non-working residents. An essential medicines system has been established on a national basis, certain basic public health services have been provided free of charge around the country, and a framework for medical and health services at the community level in rural and urban areas has gradually been developed. At the same time, we have actively implemented various fiscal and tax policies designed to promote balanced regional development, and established a system to underpin the construction of development priority zones with transfer payments. 

Third, distribution relationships between the government and enterprises and between the government and individuals have been further standardized, giving greater play to the role of taxation in regulating the economy and adjusting the distribution of income. We have unified tax rates for companies and individuals respectively, thereby giving rise to a taxation system that is more conducive to fair competition. We have widely implemented VAT on consumer products, and encouraged enterprises to increase investment and upgrade their technologies. At the same time, the reform of taxes and fees on refined petroleum products has been smoothly implemented, clarifying which items are taxes and which are fees. As a result, taxation is now playing a greater role in promoting energy conservation and emissions reduction. Nationwide reforms to tax crude oil and gas according to their prices have been implemented in an effort to improve the pricing system for energy products. We have begun trials to replace business tax with VAT in order to improve the VAT system, which has served to promote the development of service industries. Also, we have proceed with trials for the reform of real estate tax, so as to give play to the role of real estate tax in adjusting income distribution and guiding rational property purchasing. All of these measures have allowed our fiscal strength to grow constantly along with our economic development.

II. Main tasks in the current period

Taking stock of past experiences in the reform of fiscal and tax systems, we have defined the guiding principles for speeding up the reform of fiscal and tax systems at the present and for a period of time to come. Namely, gearing the reform of fiscal and tax systems towards scientific development, towards transforming the mode of economic growth, and towards safeguarding and improving the public well-being, we must speed up our efforts to develop fiscal and tax systems that are conducive to achieving scientific development. Given that this is a highly complex undertaking, we will need to make breakthroughs in the following key areas:

1. We will improve the public finance system to make the fiscal resources of the central government and local governments more proportionate to their powers and responsibilities

(1) Rationally dividing powers and responsibilities in fiscal expenditure between the central government and local governments. First, we must draw rational boundaries between the functions of different levels of government and reduce the number of tiers in the fiscal system. Then, on this basis, we need to clearly divide powers and obligations in fiscal expenditure between the central government and local governments, and between different levels of local government, by giving due consideration to entitlement groups, cost efficiency, and the prioritization of lower level governments. At the same time, while we are carrying out the reform of the tax system, we need to further clarify how revenue is to be divided between different levels of government by taking into consideration fundamentals such as the nature of different taxes and economic performance. By making the fiscal resources of governments more proportionate to their powers, we will be able to give full play to the initiative of both the central government and local governments.

(2) Optimizing the breakdown of transfer payments. We need to make scientific and rational arrangements concerning the distribution of general transfer payments and special transfer payments so that the fiscal resources of local governments can be more proportionate to their powers. Step-by-step efforts must be made to achieve the following arrangements: First, if local revenues are insufficient to cover local government expenditure, in principle, the central government will subsidize local governments through the provision of general transfer payments. Second, for affairs which have been assigned to local governments by the central government, the sufficient funds will be allocated from the central budget via special transfer payments. Third, for matters which fall under the joint responsibility of the central government and local governments, expenditure will be split between the two according to a certain ratio. In addition to the above, we will increase the scale and proportion of general transfer payments, and improve mechanisms for the central government to increase balanced transfer payments to local governments, so as to make up for shortfalls between standard revenue and expenditure at the local level. 

(3) Promoting the reform of public finance below the provincial level. We will standardize the distribution of revenue and expenditure obligations between governments below the provincial level, and reassign certain powers and obligations in expenditure to a higher level of government where appropriate, so as to promote equal access to basic public services in the various different areas of a province. Based on the correct balancing of economic management authority, we will continue with reforms in fiscal management that will place county finances directly under the management of provincial governments. We will deepen reforms, based on local conditions, to place township finances under the management of county governments.

(4) Speeding up efforts to improve a mechanism that will guarantee basic funding for county governments. We will set up a sound mechanism that will guarantee basic funding for county governments so as to ensure that county governments have sufficient funds to pay wages, carry out normal operations, and ensure the well-being of local residents. To do so, we must establish and gradually improve a mechanism for granting awards and subsidies by increasing the level of support from the central budget and provincial budgets. The level of funding will be increased along with the growth of the economy and fiscal revenue so that county and township governments will be in a better position to provide basic public services. 

2. We will improve the public finance system to promote equal access to basic public services and the construction of development priority zones

(1) Promoting equal access to basic public services. On the basis of economic development, we will improve mechanisms to ensure the steady increase of government revenue, optimize the breakdown of revenue, and enhance the quality of revenue so as to increase the funding of basic public services using public finance. We will set up a mechanism for the rational sharing of proceeds from the transfer of public resources, and ensure that these proceeds go towards public services. We will continue to optimize the structure of public expenditure, giving priority to basic public services, so as to effectively ensure and improve the public well-being. In addition, we will improve the transfer payments system, rationally allocate spending on basic public services according to factors such as local population, and gradually allow more people to enjoy the same level of public services.

(2) Adopting fiscal and tax policies that favor the construction of development priority zones. We will improve benefit compensation mechanisms for development priority zones, promote the construction of development priority zones, and achieve rational regional development in which the economy, society, and the environment coexist in harmony. We will increase transfer payments to local governments in designated areas where development activities are prohibited or limited, in order to improve their capacity to provide public services and to enhance ecological development and environmental protection in those areas. In addition, we must improve the system of transfer payments from the central government to local governments and the system of transfer payments below the provincial level. Transfer payments to major agricultural production areas, central and western regions, poverty-stricken areas, ethnic minority areas, and key ecological function areas must be increased, so as to promote balanced regional development.

(3) Improving the system for the management of budgets. Efforts should be made to make government budgets more complete, more transparent, and more effective. To do so, we need to develop a scientific, structurally optimized, and complete framework of closely-integrated government budgets that is able to reflect the total amount, structure, and management of government revenue and expenditure. The development of such a framework will assist us in the overall planning and use of public resources. We will improve mechanisms to ensure budget transparency, standardize what aspects of budgets and final accounts are made public as well as the procedures for their publication, and work towards establishing the publication of budgets and final accounts as a routine and standardized practice with a basis in law. These efforts will allow us to increase the transparency of our budgets. The system for managing budgetary performance also needs to be improved. We must work to establish a complete mechanism for managing budgetary performance to ensure that budgets are compiled with specific objectives, that the implementation of budgets is subject to oversight, that the completion of budgets is subject to assessment, that the assessment results are fed back to the relevant departments, and that feedback is applied in practice.

3. We will develop a tax system that is geared towards the optimization of the economic structure and social fairness

(1) Giving greater play to the role of taxation in promoting the optimization of our economic structure and the transformation of our mode of development. Through the passage of VAT legislation, we will steadily increase the coverage of VAT whilst reducing business tax and other taxes in an effort to promote the development of service industries, and especially modern service industries. We will make adjustments to the coverage and rate structure of sales taxes, and impose sales taxes on certain products whose production causes environmental pollution and involves the consumption of large quantities of energy. By doing so, we will be able to give greater play to the role of sales tax in promoting energy conservation and emissions reduction and encouraging more rational consumption. We will improve the corporate income tax system to encourage scientific and technological innovation. We will continue with resource tax reforms, and impose resource tax on water resources at an appropriate time in order to promote resource conservation and environmental protection. We will start collecting environmental protection taxes on items which represent heavy pollution prevention and control tasks and have mature technological standards, and gradually expand the scope of collection. This will help to promote the development of an environmentally friendly society.

(2) Fully exerting the role of taxation in adjusting income distribution. Changes will be made to individual income tax. We will promote the development of a personal credit rating system that comprises of income declaration and asset registration, and 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 level of taxation on high incomes. This will help to promote social fairness and justice. The sales tax system will be improved. We will appropriately adjust the applicable tax rates and tax items for certain consumer goods, so as to strengthen the role that sales tax plays in regulating income distribution. We will continue to promote the coordinated reform of fees and taxes in the real estate sector. Efforts to develop a sound and rational real estate tax system will help us to effectively regulate the distribution of wealth. In coordination with other aspects of tax reform, we will consolidate the taxes that are levied on real estate transitions in order to ensure that the tax burden is rational. In an effort to standardize the collection of taxes and fees on a per category basis, we will continue to streamline and consolidate administrative charges and government-management funds. This will allow us to further rectify and standardize income distribution.

(3) Developing a tax system at the local government level. In line with the tax reforms that have been detailed above, we will identify the taxation of property behavior as an important component of our local tax system, which will serve to constantly increase the tax revenue of local governments. We will grant provincial governments an appropriate amount of authority to administer tax policy and build up local sources of tax revenue subject to the unified tax policy of the central government. On the basis of national legislation, provincial governments will be authorized to adjust tax rates, modify items, grant relief, and offer exemptions in regard to general local taxes. Provincial governments will be permitted to formulate detailed regulations or specific measures for the implementation of such tax policies.

(Originally appeared in Qiushi Journal, Chinese edition, No.24, 2012)

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

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