Tax reform targets health care, small firms

The Chinese government, in a series of reforms, will gear taxes to policy goals, encourage more innovation and reduce the tax burden of smaller companies.

One focus of attention is health care. The corporate income tax rate for generic drug makers that are deemed to be high-tech producers, will be set at 15 percent, compared with the standard corporate rate of 25 percent, the State Council announced in an official statement on April 3.

The reduction aims to promote the development and production of generic drugs, which can help cut medical costs, the State Council said.

At an executive meeting presided over by Premier Li Keqiang, the body also decided to give patients, especially those suffering from cancer, more choices of drugs.

Tariffs on all imported anti-cancer drugs will drop to zero from May 1.

At the same time, protection of intellectual property rights will be strengthened to safeguard the interests of drug patent holders, and import regulations on imported drugs will be eased.

In the broader context of tax reform, China will cut value added tax rates as part of a tax-reduction package valued at 400 billion yuan (US$63.7 billion) this year, according to a March decision made by the State Council executive committee.

The rate will be cut to 16 percent from 17 percent for manufacturers and several other industries, and VAT on the sectors of transportation, construction, basic telecommunications services and farm produce will be lowered from 11 percent to 10 percent.

These reforms also come into force on May 1.

Tax incentives will also be enhanced for high-tech companies in advanced manufacturing, modern services and electric utilities. Eligible enterprises will receive a lump-sum refund for input VAT payments yet to be deducted.

Meanwhile, China’s Ministry of Finance and the State Administration of Taxation announced an increase in the threshold for general VAT taxpayers.

It means that more businesses can qualify as “small-scale VAT taxpayers” and therefore pay VAT at a rate of only 3 percent.

By contrast, the VAT for businesses in manufacturing and services — with an annual revenue of more than 500,000 yuan —was set at 17 percent.

The reform raises the revenue ceiling to 5 million yuan.

“The new reform is not simply a tax reduction, but also reworks the whole system of taxation,” said Kenneth Leung, indirect tax leader at EY China. “The moves show bold innovation in launching reforms to develop in a more international way.”

But officials are also on guard for those seeking to exploit new advantages.

That might include companies over the revenue threshold split their organization into smaller-scale companies to pay less tax.

Another reform that may interest the public is a reduction in import tariffs on cars and specified other products.

“China’s tariff reduction is an active move to expand opening up in line with development, which is inevitable to meet the growing needs of the people,” Cheng Lihua, deputy director of China’s Ministry of Finance, said at the 2018 Boao Forum for Asia.