A Look at a History of China’s Tax System
Asian Tax Journal Vol. 12 No. 1 (2011), pp. 119-152
Abstract
The history of China’s tax system can be divided into the period of the planned economy, the period of introduction of the market economy, and the period of the development of the socialist market economy. The characteristics are to be summarized as follows：First, the tax system under the socialist economy was used as a useful tool for introducing socialistic systems into all domains including politics and economy. That is, the Chinese Communist Party at that time confiscated land from the owners and re－distributed it to farmers free of charge. It put a spur to full－scale socialization：communalizing private capital and facilities and introducing the collective economic system. The Chinese government made a drastic change in the tax system on the basis of such major policies as securing its financial demand,convenient taxation management and simplified tax system. Second, in the early 1980s, when the policy of reforms and openness was in its infancy, the government reformed the business taxation system by which all business should pay tax, for the purpose of reforming stage－owned businesses that had hindered China from making economic progress, during which it completely changed the business tax system. For this purpose, the Chinese government introduced a modern business taxation system by means of two tax reforms of ‘利改稅’：asking state－owned businesses to pay tax, instead of giving some of their profits after tax payment to the government. However, the tax law for regulating state－owned businesses’profits and the regulations on tax deduction which had been recklessly applied had prevented China from achieving a stable economic growth. And as the policy of reforms and openness was deeply enforced, they presented serious problems：revealing institutional irrationality between the economic subjects. Third, in the 1990s, when the socialist market economy was introduced, the government simplified the tax systemand enforced such new tax laws in a full scale as Value Added Tax Act,Business Income Tax Act, and Taxation Management Act. This is significant in that they are the first laws to clarify the right and duty between tax payer and tax imposer, let alone helping secure financial income necessary for the development of the socialist market economy. It is evaluated that they have made a great contribution to the government’s financial soundness—it had suffered a chronic budget deficit since the full－scale tax reforms in 1994—by means of a surge in tax income. Fourth, recently, when the socialist market economy has developed, the government has announced the four basic principles of tax：simplified taxation, wide taxation, low rates of tax and strict and fair taxation. In addition, with the motto “Building Harmonious Society,” the government has been reforming all taxes including farming tax, consumption tax, personal income tax, company income tax, value added tax, trade tax and the like. It is interpreted that these are countermeasures to solve a variety of social, economic and political problems such as income unbalance between regions, between classes, and between urbanregions and rural regions, an unfair economic gap between the eastern regions and the western regions, unfair taxation between domestic companies and foreign companies, and the downturn of domestic consumption caused by excessive taxation imposed to each economic subject. Typically, the taxation environment of China nimbly changes according to the macro－policies of the central government and the communist party. Put in another way, a look at the history of China’s tax system reveals that the changes in the Party’s and the central government’s policies—Introduction of the Socialist Economy, Great Leap Forward, Cultural Revolution, Reforms of State －owned Businesses, Building Harmonious Society—preceded the reforms of its tax system. It follows that it is offurther importance that our companies which have already been, or will be, in China should conduct a deep analysis of the tax－related core policies of the central government and the Communist Party and its internal and external economic movement or trend, and that, on the basis of this analysis, it should establish an active tax plan from a long－term viewpoint.
Keywords
- history of China's tax system
- China's tax system
- China's tax reform
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