CIRCULAR OF THE STATE COUNCIL ON THE APPROVAL AND TRANSMISSION OF THE APPLICATION PROGRAM FOR INDUSTRIAL AND COMMERCIAL TAX SYSTEM REFORM OF
CIRCULAR OF THE STATE COUNCIL ON THE APPROVAL AND TRANSMISSION OF THE APPLICATION PROGRAM FOR INDUSTRIAL AND COMMERCIAL TAX SYSTEM REFORM OF
STATE ADMINISTRATION OF TAXATION
The State Council approves the Application
Program for Industrial and Commercial Tax System
Reform of State Administration of Taxation，
which is transmitted to you herewith for
conscientious application and implementation.
The industrial and commercial tax system
reform carried out this time is the largest in
scale， widest in scope， and the most profound
one in contents since the founding of the country
， the purpose of which is to adapt to the
requirements for establishing socialist market
economy. This reform is bound to vigorously
promote sustained， rapid and healthy development
of socialist economy of our country. Therefore
people’s governments of respective provinces，
autonomous regions and municipalities directly
under the Central Government should pay more
attention， strengthen the leadership and
actually do a good job of organization and
implementation of the Application Program for
Industrial and Commercial Tax System Reform.
Application Program for Industrial and
Commercial Tax System Reform
1. Basic Introduction on Present Industrial
and Commercial Tax System
Basic frame of present industrial and
commercial tax system （excluding tariff and
agricultural tax） is formed after turning
submission of profit into tax in the year of 1984
and an all-round reform on industrial and
commercial tax system. Present industrial and
commercial tax system takes turnover tax and
income tax as main taxes and coordinated with
other auxiliary taxes， 32 taxes in all. It is a
kind of complex tax system with multiple taxes，
stages and administrative levels in tax
collection. Present industrial and commercial tax
system broke through the distributive pattern of
centralized arrangement for revenue and
expenditure resulted from original planned
economy， strengthened functions of taxation for
achieving financial revenue and macro-adjustment
and control， basically adapted to the
requirement for economic development and economic
restructuring in the past 10 years. However，
there are still some imperfect aspects in present
industrial and commercial tax system， especially
the in adaptability to the requirement of
developing socialist market economy， in handling
distributive relations between the State，
enterprises and individuals and also between the
Central and local authorities. It is difficult to
duly perform its regulatory function. The
imperfections are mainly as follows：
（1） Unbalanced tax burden， which is
unfavorable to fair competition between
enterprises. There are different kinds of income
taxes applicable to enterprises according to
their ownership， with different tax rates and
incentives. Policies indifferent regions differ
from each other too. All these lead to unbalance
in income tax burden； Turnover tax rate was
designed under the conditions of taking planned
price system as the main form for the purpose of
alleviating contradictions in irrational price
system， with more brackets in rate and great
difference between brackets. Presently since
price for most products has been liberalized， it
will not be conducive to fair competition between
enterprises without simplification and adjustment
in tax rate.
（2） The distributive relations between the
State and enterprise is neither uniform nor
standardized. some unduly high tax rates make
enterprises hard to bear， tax incentives in
different names again make financial departments
difficult to afford. Local governments and
responsible departments also in various names
charge considerable amount of administrative fee
， respective kinds of funds and certain
percentage as reserve etc. from enterprises.
Overall burden on enterprises in inclined to be
heavy.
（3） Demarcation in jurisdiction between the
Central and local authorities in tax revenue and
administration cannot adapt to the requirements
of a thorough tax sharing system.
（4） The scope and degree of adjustment and
control through taxation cannot adapt to the
requirements of the market into which all
productive elements enter. Regulation through
taxation for land， capital and other markets is
far from being well established.
（5） Contradictions are becoming more
prominent day by day due to operation of 2 sets
of tax system respectively applicable to
enterprises with domestic or foreign investment.
（6） Regulations on tax administration and
collection are not rigid， measures for tax
administration and collection are out of date，
consequently resulting in serious loss of tax
revenue.
（7） Legal system on taxation is incomplete
， a mechanism with legislation， jurisdiction
and execution of tax laws being mutually
independent and restrictive has not been
established.
2. Guiding Thought and Basic Principles in
Industrial and Commercial Tax System Reform
The guiding thought on industrial and
commercial tax system reform is： to unify tax
law， make tax liability fair， simplify tax
system， reasonably share power， properly
regulate distributive relations， guarantee
financial revenue， establish a tax system
adapting to the requirements of socialist market
economy.
Following basic principles must be abided by
in deepening industrial and commercial tax system
reform：
（1） Tax system reform should be favorable
to mobilizing the enthusiasm of both the Central
and local authorities， and enhancing macro-
adjustment and control capability of the Central
Government. Tax system structure should be
adjusted， with taxes categorized and tax rates
determined rationally， so as to lay a foundation
for tax sharing system and proper distributive
relations between the Central and local
authorities； Through tax system reform，
gradually increase the proportion of tax revenue
in gross national product， rationally determine
the distributive proportion in financial revenue
between the Central and local authorities.
（2） Tax system reform should be conducive
to the performance of tax adjustment function in
individuals’ income and economic development
among regions， to promote coordinated
socioeconomic development and realize common
prosperity.
（3） Tax system reform should facilitate the
realization of fair tax burden and promotion of
equal competition. Fair tax burden is the basic
requirement for tax system in market economy，
the existing problem of classification in tax
category and rates according to different forms
of ownership and different regions should be
gradually solved， respective kinds of
enterprises should have approximately equal tax
burden through unification of enterprise income
tax and perfection of turnover tax so as to
create conditions for equal competition in the
market by enterprises.
（4） Tax system reform should facilitate the
embodiment of the state industrial policy， to
promote adjustment of economic structure and the
sustained， rapid and healthy development of
national economy and the increase in overall
efficiency.
（5） Tax system reform should facilitate
simplification and standardization of taxes.
Those taxes in adaptable to economic development
should be repealed， those repetitiously set up
should be unified， and adopt some taxes actually
necessary， realize simplification and high
efficiency in tax system； In dealing with the
issue of distributive relations， international
practice should be attended to as reference，
standard practice in taxation should be adopted
to the maximum， and the completeness of tax
system should be protected， so as to safeguard
the unification and sanctity of tax law.
3. Reform on Income Tax System
（1） Enterprise Income Tax
The goal of enterprise income tax reform is：
to adjust and standardize distributive relations
between the State and enterprises， promote
transition of enterprise operation mechanism and
realize fair competition. Main contents of
enterprise income tax reform are：
i. Income tax for enterprises with domestic
investment shall be unified as of January 1，
1994. Unification of income tax for enterprises
with domestic or foreign investment shall be the
next step.
ii. A flat income tax rate of 33% shall be
applied for enterprises with domestic investment
which is quite approaching the international tax
rate. Taking into account the actual situation of
some enterprises with low profitability，
certaintransitional preferential measures may be
taken.
Measures for administration and collection of
income tax on financial and insurance business
shall remain to be carried out according to
original regulations.
iii. Allowable expenditure items and standard
before paying enterprise income tax shall be
standardized in tax laws， change the present
practice that determination of taxable income is
subject to enterprises financial system.
Stabilize and broaden tax base， stiffen
enterprise income tax.
iv. Abolish the Regulation Tax on State-Owned
Enterprises and the fund for key construction
projects of energy and communications and the
fund for state budget adjustment levied on state
-owned enterprises.
v. After implementation of General Rules
Governing Enterprise Financial Affairs and
Accounting Criteria for Enterprises， interest on
loans by enterprises may be listed in the cost，
together with accelerated depreciation， which
provides financial source to a great extent for
the payment of loans by enterprises，
additionally with some other policies， all of
these greatly increased enterprises’ capacity for
loan payment after paying tax. Therefore， while
unifying enterprise income tax， simultaneously a
new and standard loan payment system for
enterprises shall be formulated.
vi. After unification of enterprise income
tax， current practice of contracting enterprise
income tax shall be changed.
（2） Individual Income Tax
The amendment draft of the Individual Income
Tax Law of the People’s Republic of China adopted
at the 4th Meeting of the Standing Committee of
the 8th National People’s Congress on October 31
， 1993， shall enter into force as of January
1st， 1994. The basic principles for individual
income tax reform is to regulate the difference
in income between individuals and alleviate the
contradiction of unfair social distribution. For
this purpose， Individual Income Tax shall be
mainly levied on those with higher income， while
whose with medium or low income shall be levied
less or exempted.
Main contents of individual income tax reform
are：
i. Original Individual Income tax，
Regulation Tax on Individual’s Income and Income
Tax on Urban and Rural Individual Businesses
shall be unified.
ii. The deductible threshold for expenditure
in individual income tax. Basic living expenses
shall be exempted from tax according to
international practice， and monthly deductible
amount from “income of wages and salaries” is
determined to be RMB 800 Yuan. In application of
the uniform Individual Income Tax Law， for both
Chinese nationals and foreign nationals，
additional deductible amount shall be stipulated
for the latter， the specific amount and
applicable scope shall be determined by the State
Council.
iii. Taxable items have been appropriately
adjusted， mainly with the addition of income
from production or business operation， income
from transfer of property and contingent income
by individual businesses.
iv. Based on the reality of this country and
with reference to practices of the developing or
neighboring countries， tax rate of individual
income tax is determined， in which income from
wages and salaries shall be taxed at progressive
rates ranging from 5% to 45%； income from
production and business operation of individual
businesses and income from contracted or leased
operation of enterprises or institutions shall be
taxed at progressive rates ranging from 5% to 35%
， tax liability of which is roughly similar with
that of enterprises； income from author’s
remuneration shall be taxed at a flat rate of 20%
and the amount of tax payable however shall be
reduced by 30%； and income from remuneration for
services， royalties， interest， dividends，
bonuses， lease of property and transfer of
property， as well as contingent income and other
income shall be taxed at a flat rate of 20%.
4. Reform on Turnover Tax System
Reform on turnover tax system is the key
point in whole tax system reform. Existing
turnover tax system comprises 3 main categories
of taxes， i.e. Value-Added Tax（hereinafter
referred to as VAT）， Product Tax and Business
Tax. VAT is applicable to most part of industrial
production field， small part of industrial
products （tobacco， alcoholic drinks and alcohol
， electricity， petroleum chemistry and chemical
industry etc.） is subject to Products Tax，
while Business Tax is mainly levied in the field
of commerce and other tertiary industries.
Turnover tax system consists of， after the
reform， VAT， Consumption Tax and Business Tax.
VAT is generally levied in industrial production
field， wholesale and retail commercial field， a
small part of consumer goods is levied with
Consumption Tax， and Business Tax is levied on
the kind of service and sale of immovable
property to which VAT is not applicable.
New turnover tax system is uniformly
applicable to enterprises with domestic
investment， and foreign investment and foreign
enterprises （hereinafter referred to as foreign
funded enterprises）， Consolidated Industrial
and Commercial Tax applied to foreign funded
enterprises shall be repealed. Agricultural，
forestry， animal husbandry and aquatic products
originally levied with Products Tax shall be
levied with Special Agricultural Products Tax and
Slaughter Tax.
Reform of turnover tax system should reflect
principles of fairness， neutrality，
transparency and universality， and overall tax
burden shall remain basically identical to
present level.
（1） VAT
i. VAT shall be levied on all the production
， wholesale， retail and importation of goods，
and shall not be applicable temporarily to most
part of services and sale of immovable property.
ii. Model of VAT rate system shall adopt a
basic rate， together with a low rate and a zero
rate. According to the principle of keeping
original tax burden unchanged， and considering
the factor of tax base reduction after
application of pricing system excluding tax， the
basic rate of VAT is designed to be 17% （equal
to tax rate of 14.5% on pricing method including
tax）； the low rate is designed to be 13%
（equal to tax rate of 11% on pricing method
including tax） the applicable scope of which
includes basic food and means of agricultural
production etc.； while zero rate shall be
applicable generally to export goods.
iii. VAT shall be levied through calculation
on price without VAT， that is， VAT is
calculated on goods price excluding VAT and with
prescribed tax rate.
iv. Credit system based on indicated tax on
invoice shall be carried out. Where goods are
sold in respective stages before retail， VAT and
price excluding VAT must be indicated on invoices
according to relevant regulations. To adapt
itself to consumers’ custom in China， in retail
stage of goods， hidden tax shall be applied with
no separate indication of VAT on invoices.
v. For small scale tax payers whose annual
sales amount is relatively less and accounting
system is not sound， VAT shall be calculated in
a simple way based on total sales amount and
prescribed leviable rate.
vi. Reform VAT payment system. Special tax
registration shall be required for VAT payers，
also special VAT invoice shall be used， an
investigation and inspection mechanism with cross
auditing for both purchasing and selling parties
of tax payers and an internal mechanism for
avoidance of fiscal evasion and tax exemption and
reduction shall be established.
vii. After abolishment of Consolidated
Industrial and Commercial Tax for foreign funded
enterprises and uniform application of VAT，
Consumption Tax and Business Tax， some changes
shall occur to tax burden. The burden for some
enterprises may remain at the same level as that
before the reform， some may reduce the burden
slightly and others may increase somewhat. To
guarantee the open policy of our country and the
continuity and stability of foreign related
taxation policy， the increase in tax burden to
some enterprises should be solved through proper
measures. The specific method is， the increased
part of tax calculated on the tax system after
the reform than before the reform， shall be
refunded back once at the end of the year or in
installments through the year after examination
and approval by responsible tax authorities. The
preferential period shall be limited to contract
term， but the maximum shall not beyond the year
of 1998. For newly set up foreign funded
enterprises approved after January 1st， 1994，
provisions regarding tax liability in mew tax law
shall be applicable uniformly.
（2） Consumption Tax
After all products originally levied with
Products Tax changed into levying of VAT， tax
burden for quite an amount of products shall be
reduced greatly. To safeguard national financial
revenue， embodying the principle of maintaining
identical tax burden as before， also in
consideration of special adjustment on some
consumer goods， small number of consumer goods
shall be selectively levied with Consumption Tax
on the basis of levying VAT. There are 11 tax
able items for Consumption Tax， mainly including
tobacco， alcoholic drinks and alcohol，
cosmetics， precious jewelry， motorcycles，
motor cars， gasoline， diesel oil etc.
Calculation of tax payable for Consumption Tax
shall follow either the amount on volume or the
rate on value method. Consumption Tax payable
under the rate on value method， shall be
calculated according to the price excluding VAT，
but including Consumption Tax， and the
prescribed rate.
（3） Business Tax
The taxable scope of Business Tax after the
reform consists of provision of service，
transfer of intangible assets and sale of
immovable properties. For communications and
transportation， construction， posts and
telecommunications， culture and sports etc. tax
rate is 3%； for finance and insurance， services
， transfer of intangible assets and sale of
immovable properties etc. tax rate is 5%； for
entertainment， tax rate is 5-20%.
Units and individuals performing the
activities of the above-mentioned operation，
transfer and sales shall be liable to pay
Business Tax calculated on the turnover and
prescribed tax rate.
5. Reform on Other Taxes
（1） Resource Tax
At present， Resource Tax is levied only on
part of resource products and a number of
enterprises engaged in the exploitation of
resources， the leviable scope is restricted and
tax burden is relatively light. To perfect the
system of taxing resource products in China， the
scope of Resource Tax after reform shall cover
all mineral resources， tax able items shall
include coal， crude oil， natural gas， iron ore
and other ferrous metal ores， bauxite and other
non-ferrous metal ores， non-metal ores and salt.
Tax burden shall be adjusted properly in
coordination with VAT reform.
Resource Tax shall be calculated in
accordance with the assessable volume of the
taxable products and the prescribed unit tax
amount， a tax amount range is set up with the
upper and lower limits. Tax amount may vary for
the same kind of resource products with different
exploiting conditions.
Land Appreciation Tax （hereinafter referred
to as LAT） is formulated in order to adjust
properly the unduly high profit from real estate
transactions. LAT is levied in the transaction
stage of real estate and on the appreciation
amount of the proceeds from transaction. The
appreciation amount shall be the balance of
proceeds received by the tax payer on the
transfer of real estate， after deducting the
deductible items. The deductible items mainly
consist of the sum paid for the acquisition of
land use right， coats and expenses for the
development of land， costs and expenses for the
construction of new building for sale and
facilities and the taxes related to the sale of
real estate etc.
LAT shall adopt 4 level progressive rates as
follows： For that part of the appreciation
amount not exceeding 50% of the sum of deductible
items， the tax rate shall be 30%； For that part
of the appreciation amount exceeding 50%， but
not exceeding 100%， of the sum of deductible
items， the tax rate shall be 40%； For that part
of the appreciation amount exceeding 100%， but
not exceeding 200%， of the sum of deductible
items， the tax rate shall be 50%； For that part
of the appreciation amount exceeding 200% of the
sum of deductible items， the tax rate shall be
60%.
（3） Securities Transaction Tax
Turn present measure to levy Stamp Tax on
stock transaction into Securities Transaction
Tax. Due to the fact that the Securities Law of
the People’s Republic of China is in the process
of being examined by the Standing Committee of
the National People’s Congress， levy of the
Securities Transaction Tax shall be introduced a
little later for convenient dovetail.
（4） Urban and Rural Maintenance and
Construction Tax
To reflect the correspondence principle of
suing municipal facilities and tax liability，
changes shall be effected in Urban and Rural
Maintenance and Construction Tax from the present
practice of an additional amount on turnover tax
to calculation on the basis of sales proceeds；
Present irrational tax rate structure shall be
changed， for municipalities tax rate is 0.6%，
for counties and township tax rate is 0.4%， for
places except the above tax rate is 0.2%， Urban
and Rural Maintenance and Construction Tax should
be made one of the main taxes in local tax
system. Foreign funded enterprises not liable to
pay Urban and Rural Maintenance and Construction
Tax at present should also become its taxpayers.
（5） Land Use Tax
Tax amount of Land Use Tax shall be increased
properly， its applicable scope shall be enlarged
， and devolution of administrative power shall
be effected as appropriate.
（6） Other taxes to be regulated
i. Abolish Market Transaction Tax， Cattle
Transaction Tax， Special Tax on Oil Fuel， Bonus
Tax and Wages Adjustment Tax； ii. Merge Special
Consumption Tax into Consumption Tax performing
special adjustment function， and Salt Tax into
Resource Tax； iii. Abolish Urban Estate Tax and
License Tax on Vehicle and Vessel Use on foreign
funded enterprises and foreign nationals， apply
uniformly House Tax and Vehicle and Vessel Use
Tax， and increase properly existing relatively
low tax rate and tax amount； iv. Transfer
Slaughter Tax and Entertainment Tax to localities
； v. Start to levy Estate Tax.
32 kinds of taxes in the industrial and
commercial tax system in China shall be reduced
to 18 kinds of taxes after there form， tax
system structure tends to be more rational， and
its high efficiency and simplicity shall be
realized preliminarily.
6. Reform on Administrative System of Tax
Collection
After application of above reforms， a tax
system structure adaptable to the requirement of
socialist market economy system shall be formed.
Simultaneously， reform on administrative system
of tax collection must be promoted， thoroughly
change the present situation that the
administrative system of tax collection is not
strict and the measures for tax collection are
out of date， raise the administrative level of
tax collection fundamentally， set up a
scientific and strict administrative system of
tax collection， so as to guarantee the
implementation and application of tax laws and
establish normal order in taxation.
（1） Set up universal tax return filing
system. Tax return filing is the essential link
for tax payers to fulfill their tax liability.
Establishment of the system shall be helpful for
forming a self-controlled mechanism for tax
payers， enhancing the tax consciousness of the
citizens， which is a basic project for tax
authorities to perform effective administration
of tax collection. After the establishment of tax
return filing system， whoever fail to file
returns in time， or file deceptive returns shall
be considered as misbehavior of fiscal evasion
and be penalized strictly according to law.
（2） Actively promote tax agency system. A
system with social medium agencies such as public
accountant offices， lawyers’ offices etc. to
manage tax affairs on behalf of tax payers，
should be carried out according to international
general practice， making the system gradually
become an dispensable link in the administration
of tax collection.
（3） Accelerate the process of
computerization in the administration of tax
collection. International experience has proved
that it is the only way to build up a strict and
efficient tax collection monitoring and
controlling network through adopting advanced
technology and facilities such as computers etc.
in the administration of tax collection， which
is also helpful for reducing the cost in tax
administration. Due to the fact in our country
that the scattered tax payers are relatively more
， the foundation for computer management is not
yet well laid， it may be considered to start
computerization from the cities and the
administration of tax collection in important
taxes， then gradually shape a nation-wide
computerization net covering the country both in
length and width in administration of tax
collection.
（4） Set up strict tax investigation and
inspection system. After general application of
tax return filing and tax agency systems， the
main man-power of tax authorities shall turn to
day-to-day important tax investigation and
inspection， forming three-in-one administrative
pattern of tax collection with tax return filing
， tax agency and tax investigation and
inspection， simultaneously supplemented with
severe penalty for fiscal evasion behavior.
（5） To suit the needs of tax sharing system
， organize two sets of tax organizations of the
Central and local authorities.
（6） Determine the basic norms in taxation
to meet the requirements of socialist market
economy. At present， it is especially necessary
to emphasize： Tax payers must pay their tax
according to law， tax authorities must collect
Tax according law； Tax must be levied according
to the rate stipulated in the provisions of tax
law， tax cannot be contracted and tax rate
cannot be altered arbitrarily； All sales
proceeds must be levied with tax to resist
erosion on tax base； The tax that should be
levied according to the value must be done so，
eliminate the current policy of no tax on the
proceeds resulted from increased price in some
industries； Except tax exempt or reduced items
stipulated in the tax law， governments at all
levels and departments shall not create any
precedent of tax exemption or reduction.
（7） The legislative power to build up
central tax， and local tax uniformly applied
through the country， shall be vested in the
Central Government.
（8） Enforce legal system in taxation，
speed up the completion of legislative procedure
for tax law and regulations； Setup gradually the
mutually independent and restrictive mechanism
with tax law legislation， jurisdiction and
enforcement.
After application of the above measures， a
new pattern of tax administrative management
shall be formed with four systematic lines of tax
law and regulations， administration of tax
collection， tax investigation and inspection，
and tax review and appeal equally stressed，
mutually harmonized and restrictive.
The Application Program for Industrial and
Commercial Tax System Reform shall come into
effect on January 1st， 1994 in the whole
country.
Recent Comments