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CIRCULAR OF THE GENERAL OFFICE OF THE STATE COUNCIL CONCERNING THE APPROVAL AND TRANSMISSION OF SUGGESTIONS SUBMITTED BY THE STATE TAXATION ADMINISTRATION CONCERNING THE APPRAISAL, RECTIFICATION, AND STRICT CONTROL OF TAX REDUCTIONS AND EXEMPTIONS

    The report "Suggestions Concerning the Appraisal, Rectification, and
Strict Control of Tax Reductions and Exemptions" submitted by the State
Taxation Administration has been approved by the State Council, and is now
hereby transmitted for implementation. Please report the results of appraisal
and rectification to the State Council by the end of March, 1989.
SUGGESTIONS CONCERNING THE APPRAISAL, RECTIFICATION, AND STRICT CONTROL OF
TAX REDUCTIONS OR EXEMPTIONS

    Last year, after the promulgation of "Decisions Concerning the Better
Enforcement of Taxation Laws and Discipline and the Improvement of Tax
Collection" by the State Council, each locality investigated and appraised
cases where excessive authority was used to grant tax reductions or exemptions
and rectified some of them. Definite positive effects have been achieved as a
result. However, because some localities have placed undue emphasis on partial
and local interests, this issue has not been thoroughly investigated and
rectified, and those cases that should be corrected remain uncorrected. Since
this year, some localities have been continuously exceeding their authority to
reduce or exempt taxes on new items. This has seriously affected the
macro-control of the national economy and the stable increase of fiscal
revenue. In conformity with the requirements of the State Council on the
prohibition of the downward spread of the power of tax collection and the
strict control of tax reductions and exemptions, the whole-hearted
rectification of reduced and exempted taxes, suggestions concerning the
appraisal, rectification, and strict control of tax reduction and exemption
are hereby put forward as follows:

    1. In order to strictly control the blind development of some special
kinds of consumer goods and goods in over-supply, no locality may reduce or
exempt product taxes or value-added taxes on tobacco, alcoholic beverages,
firecrackers, fireworks, clocks, watches, bicycles, sewing machines, electric
fans, refrigerators, motorcycles, washing machines, vacuum cleaners, air
conditioners, electronic keyboards, pianos, TV sets, tape recorders, cassette
players, video cassette recorders, electronic video games, pull-top cans,
canned beverages, aluminum doors or windows, architectural decorations,
kilowatt-hour meters, saccharin, adhesive clay bricks or tiles, cosmetics for
the skin and hair, and articles for use in a memorial ceremony, which are
produced or marketed in that locality, regardless of the ownership or type of
enterprise. No product tax, value-added tax, or income tax may be reduced or
exempted for small scale wool mills, cotton mills, silk mills, oil refineries,
lacquer factories, metal rolling factories, cigarette factories, or alcoholic
beverage factories.

    The reduction or exemption of taxes on all aforesaid items that have
already been approved shall be suspended and normal collection resumed as of
January 1, 1989. From now on, in order to meet the demands of state
macro-control, the State Taxation Administration is authorized, when
necessary, to list additional items that may not be subjected to tax
reductions or exemptions.

    2. For importing market-saturated goods, consumer goods for which market
prices have been freed, and state-restricted imports, product taxes and
value-added taxes on the importation of these goods may not be reduced or
exempted. For export products manufactured by enterprises, a complete tax
refund will be given at the time of export, and therefore no product tax or
value-added tax on the production of export products manufactured by
enterprises may be reduced or exempted.

    3. Appraisal and rectification of tax reductions or exemptions for various
companies. Taxes on comprehensive companies, banking companies and companies
in service industries should be collected according to stipulations and
regulations. No product tax, value-added tax, or business tax which should be
paid may be reduced or exempted, and such reductions or exemptions which have
been approved should be suspended immediately. In the event of true
difficulties in paying income taxes during the early stage of operation, the
period of the reduction of or exemption from income tax shall be less than one
year; reductions or exemptions from income tax that have already been approved
to exceed one year shall be enforced according to the above regulations.

    4. The unified preferential policy of tax reductions or exemptions for
township enterprises stipulated by the state shall continue to be implemented,
and within the limits of their respective authorities over tax administration,
all localities shall strictly control the reduction of or exemption from
product taxes, value-added taxes, and business taxes. Approvals of tax
reduction or exemption by any locality which exceeds its respective authority
shall cease immediately. After strict verification, a special consideration of
one year reduction of or exemption from income tax may be granted to a small
number of enterprises that have authentic difficulties in paying taxes in the
early stage of operation. Any alteration of income tax rates or any collection
at a reduced portion of the tax rate by any locality must be corrected and
normal collection resumed. The range of itemized expenditures before income
tax payment shall be implemented strictly in accordance with the provisions
uniformly stipulated by the state, and may not be extended without
authorization. The examination and approval of reductions or exemptions for
township enterprises should be handled strictly in accordance with the
stipulations by present administrative systems, and the power of examination
and approval may not be transferred to lower levels of authority. After the
period for tax reduction or exemption for enterprises comes to an end, no
enterprise may obtain further tax reductions or exemptions by changing factory
names, product names, or the trademarks thereof, nor through other fraudulent
means. The discovery of such acts shall be treated and prosecuted as tax
evasion.

    5. All localities and departments must strictly implement the uniform
national policies governing foreign-related taxation, and may not exceed their
respective authorities to determine preferential treatment on foreign-related
taxation. All unauthorized decisions on reduction of or exemption from taxes,
which are in violation of uniform national taxation laws and administrative
regulations promulgated by the State Council, are invalid and should be
publicly repealed and corrected.

    6. In order to make greater efforts to cut down the scale of
infrastructure construction, the macro-control role of the construction tax
should be fully brought into play, and a construction tax on construction
investments made outside the state plan shall be strictly imposed. No locality
or department may reduce or exempt taxes without authorization, with the
exception of those tax reductions or exemptions stipulated uniformly in
taxation laws and regulations.

    7. The tax authorities at various levels shall strengthen their
supervision and control on tax reductions or exemptions and rigorously enforce
procedures of examination and approval. In handling tax reductions or
exemptions, all tax authorities at various levels shall implement laws and
regulations impartially, and may not abuse their authority for selfish
benefits. With respect to those items of tax reduction or exemption of very
large amounts or widespread influence, the tax authorities shall carry out
specific investigations, examine them collectively, and report to higher
authorities level by level for approval. No individual may make decisions
regarding tax reductions or exemptions, and those who are in violation of this
stipulation shall be severely punished.

    8. The appraisal and rectification of tax reductions or exemptions is a
policy-oriented task. It involves the economic interests of all localities,
departments, and units. The local people's governments at various levels shall
strengthen their leadership and make earnest appraisals and rectifications
from the perspective of the general public interest and macro-scopic demands.
We suggest one leader from each province, autonomous region, and municipality
directly under the Central Government be appointed to take charge of this task.