China, fearing that increasing pressure on fiscal expenditures will render its export-tax-rebate system useless, is considering an unprecedented reform package.

The central government will likely lower tax-rebate rates by 4 per cent and eliminate refunds on certain products to alleviate the heavy burden on the Ministry of Finance, China Business Post reported last week.

"We are still weighing plans to revamp the system," said a Ministry of Finance spokeswoman, who only gave her surname, Lou.

She refused to provide further details.

Manufacturers currently receive an average tax rebate of 15.5 per cent on products they export. However, they pay a 17-per-cent, value-added tax on their manufactured goods.

The plan, which would follow the government's decision to raise the rebate quota, would be aimed at solving chronic issues with China's tax-rebate system.

Manufacturers have complained the government has failed in recent years to promptly issue their rebates.

The rebate system was introduced in the late 1990s to contain jitters caused by the 1997-98 Asian financial crisis.

Ministry of Finance officials said demand for rebates from China's fast-growing export sector each year has far exceeded the quota set early each year.

Statistics indicate China's exports have nearly doubled over the last five years, due in part to higher rebate rates.

But during the same period, more than 200 billion yuan (US$24.1 billion) worth of tax rebates have been delayed, including nearly 60 billion yuan (US$7.27 billion) last year.

Delayed tax rebates this year will exceed 300 billion yuan (US$36.25 billion) if the trend is not to be reversed, experts warned.

"The piles of delayed rebate payments reflect the deficiencies deep inside our tax-rebate system," said Long Guoqiang, an economist with the State Council's research and development centre.

"The system needs to be overhauled as soon as possible."

The government, facing the Herculean task of reviving China's SARS-hit export sector, must first reduce delayed tax-rebate payments.

"Reducing the rebate rate will significantly alleviate the government's fiscal burden," said Huang Yiping, an economist with Citigroup Global Markets Ltd (Greater China Area).

"This will guarantee the rebates are paid to exporters on time."

Chinese Finance Minister Jin Renqing vowed in May to "speed up the rebate process" and to "work out specific plans" to reform the system.

Analysts said the plan to cut rebate rates is Jin's first step in tackling the thorny issue.

However, experts warn reducing the rebate rate will likely weaken the central government's ability to sustain the export sector's growth, which, in turn, will harm China's manufacturers.

"Comparatively high tax-rebate rates have long served as the driving force for manufacturers exporting their products," said Zhang Tianming, a senior tax expert with the China Taxation Consultancy Co.

"Lowering the rate will inevitably affect China's exports, if no other supporting policies are implemented."

Manufacturers have expressed concerns about possible changes in China's tax-rebate system, Zhang told China Business Weekly.

"But if the rebate-payment process can be accelerated, it will be a trade-off," he added.

Previous statistics indicated 80 per cent of China's export-oriented companies have had to wait at least a year to receive their tax rebates.

The percentage is even higher in China's eastern, coastal provinces, where the combined rebates account for more than 75 per cent of all tax rebates in the country.

"This has severely affected manufacturers' cash flows and, in some cases, made them insolvent," Zhang said.

In addition, rebates on natural resources - including refined oil, crude, timber and copper - and exports which could affect international market prices will be eliminated, sources said.

This will involve 10 billion yuan (US$1.21 billion) worth of rebates, experts estimated.

The plan also calls for a shared-responsibility mechanism, in which local governments will pay one-quarter of the rebates. The central government currently pays the rebates.

As most of the tax rebates are paid to enterprises located in the more developed eastern provinces, the rebate system, to a degree, has helped to widen the economic chasm between eastern and western China, experts suggest.

Local governments, which also collect taxes from export-oriented companies, should help pay the rebates, Long said.

Tax rebates are common in international trade. Governments usually return value-added and consumption taxes to export-oriented companies for their products sold abroad.

Governments often use tax rebates to boost exports and increase their nations' companies' competitiveness, especially products' prices, in international markets.

China is also sparing no effort in cracking down on tax-rebate fraud.

The State Administration of Taxation announced in May that more than 55,000 businesses had been inspected, and that firms had received 8.65 billion yuan (US$1.04 billion) in fraudulent tax rebates.

Zhang Baoxiang, once a renowned entrepreneur and head of State-owned Baoxiang Export and Import Co in Hebei Province, was sentenced last month to life in prison for rebate fraud.

Zhang was convicted of receiving 193 million yuan (US$23.32 million) in fraudulent tax rebates.

China last month increased its tax-rebate quota by 30 billion yuan (US$3.63 billion) to meet the soaring growth in exports in the year's first half.

The tax-rebate quota for this year is 158.9 billion yuan (US$19.20 billion).

Close

Today's Top News		Top China News
+Commentary: Don't meddle with yuan ( 2003-09-02) +200,000 troops to be cut by 2005 ( 2003-09-02) +Beijing Games marketing plan launched ( 2003-09-02) +Flood forces 10,0000 to evacuate ( 2003-09-02) +Beijing courts announce 50 major changes ( 2003-09-02)		+200,000 troops to be cut by 2005 ( 2003-09-02) +HK, Macao embrace mainlanders ( 2003-09-02) +Flood forces 10,0000 to evacuate ( 2003-09-02) +Beijing courts announce 50 major changes ( 2003-09-02) +Comment: No tolerance for evil ( 2003-09-02)