Mr. Arora (ext. 36211) or Mr. Norregaard (ext. 36383) is available to answer questions related to this paper before the Board discussion.
Owing to incomplete information for earlier years, the paper presents data relating only to the period after 1985. Information on budgetary financing operations, necessary for conversion of historical official data to GFS format, were not available for the earlier period. Official data do indicate, however, that the ratio of fiscal revenue to GDP rose from 29 percent in 1970 to 31 percent in 1978 and declined steadily thereafter.
The definition of fiscal revenues referred to in this paper comprises the total budgetary revenues of the central and local governments.
Tax revenue accounts for over 90 percent of overall revenue. Nontax revenue was a major source of revenue in earlier years, when it included a large share of SOE funds (mainly profit remittances and depreciation funds). It became less important after 1984 when SOE profit remittances were for the most part changed to taxes, and recently it has amounted to less than 1 percent of GDP.
In part, the performance of the VAT reflected the widening of the VAT base through the inclusion of other indirect taxes during the 1994 tax reforms (discussed below), but it is notable that the VAT ratio increased even during the period before 1994.
Capital goods imported by FFEs, representing a significant proportion of total imports, are, however, exempt from the VAT.
The sample included Indonesia, Japan, Korea, the Philippines, Singapore, and Thailand. The adjustments made in estimating the VAT productivity for China involved inclusion of the revenue from the business tax and exclusion of the potential revenue contribution from capital goods (which were estimated by the authorities to contribute roughly one third of the tax base for the VAT).
The share of other taxes remained unchanged at about 10 percent.
See Wanda Tseng and others Economic Reform in China: A New Phase (Washington DC: IMF Occasional Paper No. 114, November 1994), Chapter IV, for a comprehensive discussion of weaknesses in the fiscal policy framework and of the fiscal reforms launched in 1994.
See Chapter IV of SM/95/44, issued on March 9, 1995, for a summary of China’s foreign investment policies and incentives.
In 1996, the authorities intended to significantly scale back the incentives system and to provide incentives mainly for investment in priority sectors, such as infrastructure, and in the inland areas.
See Chapter V of Wanda Tseng and others (op cit.). Incentives under the domestic enterprise income tax are provided under 11 broad eligibility criteria.
The broad-based VAT introduced in 1994 involved the zero rating of exports (in line with international practice), although, due to the rebates having been deemed excessive, the rate of refund on input VAT paid on production of exports was reduced from 17 percent to 14 percent in July 1995, and further to 9 percent in January 1996. In addition, some categories of imports, including, as mentioned, capital goods imported by FFEs, are exempt from the VAT.
In 1996, it was intended that concessions on imports of machinery and equipment would be among the incentives to be terminated.
Tax contracts were designed to balance the need for government revenue with the objective of increasing the autonomy and financial accountability of SOEs by giving them control over a larger share of their funds.
SOE profits, apart from taxes, had also been subject to special levies. These levies were abolished in January 1994.
An important related consequence was the shrinking share of the central government in total revenue. The share (before transfers) fell from 50 percent in 1985 to 36 percent in 1993.
Lack of sufficiently detailed information concerning the various tax bases makes it difficult to quantify the relative importance of each of the factors referred to below. A further caveat to this discussion is warranted insofar as there is often, as in most countries, a discrepancy between the tax bases defined in tax laws and those to which the laws are applied in practice.
These consumption estimates were derived residually, based on official data for investment and the external current account. In 1995, the authorities published an independent set of consumption data which only indicated a decline in the consumption-GDP ratio from 64 percent in 1985 to 59 percent in 1994.
For example, if the standard rate of tax on consumption is 17 percent, then a reduction of 10 percentage points in the share of consumption in GDP would lead, to a first approximation, to a reduction in the revenue from consumption taxes of 1.7 percent of GDP.
These data refer to exports of goods and nonfactor services.
See Annex III of the forthcoming World Bank report, China: Updating Country Economic Memorandum, 1996 for a discussion of tax administration needs in China.
Problems in tax administration have been an important factor behind indications of growing tax evasion and tax arrears.
See Richard Hemming, Adrienne Cheasty, and Ashok Lahiri, “The Revenue Decline” (Chapter V) in Daniel Citrin and Ashok Lahiri (editors) Policy Experience and Issues in the Baltics, Russia, and Other Countries in Transition (Washington, DC: IMF Occasional Paper No.133, December 1995) for a comprehensive discussion.
In the transition economies of eastern Europe, the decline in the revenue ratio was more pronounced. The ratio fell by over 10 percent of GDP during the 1989-91 period, and by a further 3 1/2 percent of GDP by 1993. See Gerard Belanger, “Eastern Europe: Factors Underlying the Weakening Performance of Tax Revenue”, IMF Working Paper WP/94/104, September 1994, for a discussion of the eastern European experience.
The buoyancy of trade taxes was attributable in part to the replacement of wide-ranging quantitative trade restrictions by tariffs.
See Gerard Belanger (op cit.).
See Hemming and others (op cit.). In a few countries (Kazakstan, Tajikistan, Ukraine, and Uzbekistan), the revenue ratio increased, mainly owing to special factors.