China reduced the burden on market entities by more than 2.6 trillion yuan (approx. 393.94 billion US dollars) in 2020 by making both time-limited large-scale tax and fee cuts and institutional arrangements. In particular, the micro, small, and medium enterprises (MSMEs) and self-employed individuals, which are large in number and extensive in scope, took the most difficult hit from COVID-19, were helped to weather what was a very tough time.
In 2021, China will continue to implement systematic tax cuts, extend the duration of several temporary policies such as VAT relief for small-scale taxpayers, and adopt new polices on structural tax reductions to offset the impact of some policy adjustments. The VAT threshold for small-scale taxpayers will be raised from 100,000 yuan (approx. 15,151 US dollars) to 150,000 yuan (approx. 22,727 US dollars) in monthly sales and all due VAT credits will be refunded to advanced manufacturing enterprises on a monthly basis. In addition, on the basis of preferential treatment already in force, Chinese government will halve the income tax of micro and small enterprises and self-employed individuals on annual taxable income below one million yuan (approx. 151,515 US dollars). The policy of granting a super deduction of 75 percent on enterprises’ R&D costs will continue and be further raised to 100 percent for manufacturing enterprises, which is expected to encourage enterprises to increase R&D spending and pursue innovation-driven development. Moreover, the catalog of corporate income tax credits will be expanded for environmental protection and the conservation of water and energy. And well-regulated development of the long-term rental housing market will be further guaranteed by cutting taxes and fees on rental housing.
“By extending the duration of some tax relief measures to specifically benefit smaller businesses, the government is determined to maintain stability and continuity of macroeconomic policies,” Li Xuhong, Director of the Institute of Finance and Taxation Policy and Application with the Beijing National Accounting Institute commented. CNBC reported that Chinese government supported businesses with tax cuts and cheaper loans during the COVID-19 pandemic, which contributed to China’s economic growth by 2.3% in 2020.
The tax and fee cuts will help reduce the small and micro enterprises' operational costs, while the simplified procedures will help them save precious time. The extended policies will increase the share of pre-tax deductions for research and development expenses, the value-added tax exemptions of interest income of small and micro businesses of financial institutions, and VAT exemption for some pension institutions. The State Taxation Administration (STA) will take further steps to fully implement relevant policies to support key areas.