Key Points:

  • VAT reforms to see tax reductions of more than US$17 billion
  • Increased export tax rebates for some labor intensive industries  

Given the global credit crunch and concerns regarding demand for China’s exports, the government recently announced an RMB4 trillion (US$585 billion) domestic infrastructure spending package designed to stabilize China’s economic growth rate. In parallel with this development, and in response to a global downturn in demand, the State Administration of Taxation has taken bold new steps to boost domestic demand through a series of experimental VAT reforms, or reduced taxation, scheduled to begin in early 2009. These VAT reforms are expected to result in tax reductions of more than US$17 billion. The additional liquidity available to companies as a result is expected to generate further investment in research and development and an increase in domestic consumption.  

In addition, the State Administration of Taxation and the Ministry of Finance have released a Notice on Increasing the Export Tax Rebate Rates for Labor Intensive Products and Other Products Subject to Value-Added Tax, which increases export tax rebates for certain labor intensive industries, effective December 1, 2008. The rebate rate for certain rubber and forestry products will increase from 5% to 9%; for certain molds and glass products, the rate will increase from 5% to 11%, while the rate for fisheries products will jump massively, from 5% to 13%. Increases from 5% and 9% to 11% are also slated for bags, shoes, home products, lights and nonferrous processed materials. Rebates on certain machinery products will rise from between 9% and 13% to between 13% and 14%. All of this is good news for domestic manufacturers, especially in labor intensive industries, who face an uphill sales battle amid growing uncertainty in global markets.  

The new adjustments represent the third time China has adjusted export tax rebates this year alone. On August 1, 2008 the rebate for certain textiles and garments was increased from 11% to 13%; this was followed by a further adjustment, effective November 1, 2008, that saw increased rebates for myriad products in the labor intensive production sector, particularly textiles, garments and toys, and also for certain high-tech products. The new year may also witness reductions in corporate income tax, leading to enhanced liquidity for many enterprises. The recent economic stimulus package, coupled with adjustments to export rebates and expected reductions in corporate income tax, should serve to soften the impact on China of the global sag in demand and a contracting US economy.