The government should reduce tax burdens for domestic financial and insurance companies to increase their competitiveness, according to economic experts.

For many years, the financial sector has been considered a high-profit service industry. The government currently levies 11 varieties of taxes, including a business tax and an enterprise income tax on these ventures.

The government imposed a 5 per cent business tax and a 55 per cent income tax on financial and insurance companies in 1994 when the country implemented a new taxation system.

In 1997, the business tax rate was adjusted to 8 per cent, as the income tax rate dropped to 33 per cent.

While aiming to support the reform of the financial and insurance industries, the government decided to cut the business tax rate from 8 per cent to 5 per cent within the ensuing three years until 2003.

In 2001, tax income generated from financial and insurance companies reached 77 billion yuan (US$9.3 billion), accounting for more than 5 per cent of the country's total tax revenue.

"China's financial and insurance companies bear too much of the tax burden, compared with their competitors in other countries," said Zhang Peisen, a senior researcher with the Taxation Research Institute.

In certain other countries, governments usually do not levy a business tax. In addition, financial companies can be exempted from value-added taxes.

In China, the government should start by unifying the enterprise income tax system, Zhang said. China is now enforcing two-pronged enterprise income tax policies for domestic and foreign-funded companies.

The income tax rate for domestic companies is 33 per cent, while that for foreign-backed companies is 17 per cent.

Also, the government should further cut the business tax rate for financial and insurance companies to no more than 3 per cent in the future, said Xia Jiechang, a senior economist with the Chinese Academy of Social Sciences.

Experts have estimated that cuts to the business tax rate by 1 percentage point could help financial and insurance companies save 6 billion yuan (US$722 million).

This would surely help these companies increase profits while becoming more competitive, said Xu Zhendong, a researcher with the International Finance Research Institute.

The State-owned commercial banks would be the biggest beneficiaries of the tax rate cut, since business income accounted for a significant portion of the banks' total income, he said.

In case the government is unable to increase input into banks, the cut of business tax rates could help increase their capital adequacy, he said.

The country's commercial bank law stipulates that the capital adequacy ratio needs to be at least 8 per cent, the minimum figure required by the Basel agreement forged by international banking managers.

(China Daily 06/24/2003 page5)

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