According to Ministry of Finance (MoF) statistics, China’s total revenue in July was RMB 532.325 billion, an increase of 13.8% over the same month last year. But this growth rate is 19.3 percentage points lower than in July, 2007, and 19.7
 percentage points lower than the growth rate in the first half of the year.
Corporate income tax totaled RMB 149.635 billion, 4.2% less than last July’s total and growing by 38.7 percentage points less than in that same month. It was 45.7 percentage points lower than the growth rate of the first half of this year. The downturn of a number of industries is pushing the decline, but it is not considered to be extraordinary since tax growth in the last few years has risen too fast.
A Dramatic Decline
Except for value-added tax, others such as turnover and income taxes have all seen a two-digit fall. Corporate income taxes actually saw negative growth. For the first time since 2003, tax growth has experienced a dramatic decline.
Turnover tax in China mainly includes value-added and business tax. Income tax mainly includes corporate and personal income tax. Turnover tax and income tax in July totaled 403.6 billion yuan, accounting for more than 75% of the total fiscal revenue.
The MoF links the decline in corporate income taxes to a decline in companies�performance. Between January and May, profits of industrial firms with annual sales revenue of more than RMB 5 million increased by 20.9%, a growth rate 21.2 percentage points lower than in the same period last year. Due to RMB appreciation and raw material and energy price hikes, in the first half of the year about 65,000 small and medium-sized enterprises went broke.
The new tax law, which cut the income tax rate for domestic enterprises from 33% to 25%, is another reason for the decline of revenues. In July personal income tax totaled RMB 28.087 billion, an 8.2% growth over the same month last year, but this growth rate is 22.3 percentage points lower than in July 2007, and 19 percentage points lower than the growth rate in the first half of the year.
The MoF says the decrease in the growth of personal income tax was partly because workers got a large part of their income during the spring festival in the beginning of the year. Another major reason is that the economic downturn has slowed compensation growth. In the first half of the year, disposable income increased by 14.4% over the same period last year, 3.2 percentage points lower than the growth rate in the first half of 2007. Â
In July value-added tax grew by 21.5% year on year, a slight drop over the growth rate in July 2007, and remaining close to the growth rate in the first six months of this year.
But the growth of business tax in July dropped by 17.4 percentage points year on year. The business tax and value-added tax are both turnover taxes, the difference being that value-added tax is from industrial and commercial firms while business tax comes from service industries.
The decrease in the growth of business tax is due largely to a downturn in the financial area. MoF figures show securities stamp revenues in July falling by 71.8%, or RMB 12.670 billion, over the same month last year. Other reasons include declines in the real estate, tourism and logistics industries.
The Decline Will Continue
Professor Liu Heng of the Central University of Finance and Economics said the tax decline would likely continue due to the economic slowdown but would not largely affect fiscal expenditure.
On July 8, the MoF warned departments to be ready for pressure on spending in the coming year. In the first half, budgeted income of local governments was RMB 1.526521 trillion, and the budgeted disbursement was RMB 1.806929 trillion, showing a deficit of RMB 280.408 billion.
Meanwhile, tax from land and real estate, a major source of the local governments�incomes, has also declined drastically. In July, land-related tax increased by 79.4% over the same month last year, for a total of RMB 14.306 billion, but this was 25 percentage points lower than in July 2007.
Land transfer income has also decreased, due to the real estate market doldrums. This income should have been included in the government’s budget but, in fact, has not been, so the budgeted incomes of local governments don’t represent their real income level.
Liu Heng thinks the tax decline "won’t be a big problem", since China has put a certain amount of money from its tax income every year into a rainy day account.
Gong Fangxiong, general manager of JP Morgan Chase (Asia), said in a report that hit the market last week that the Chinese government was considering an economic stimulation proposal in which a total of RMB 200-400 billion was involved and might loosen monetary policy at the end of the year. The rumor aided a 7% jump in the A-share market on Tuesday, while the government has kept mum.
But Yang Zhiyong, of the Chinese Academy of Social Sciences, says there is not much room for a tax cut, as the government is already considering value-added tax reform. A prerequisite for tax revenue is firms making profits. Earlier the government had already cut the tax burden of domestic companies. Now the problem is the decline in their performance, not the tax itself.
Liu Heng believes about 17% tax growth would suit China’s 10% GDP growth and about a 7% price increase, and considers the current tax decline a rational fallback.
Â