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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 inadaptability 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 in different 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 inadaptable 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, certain transitional 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 taxable 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, taxable 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.

    (2) Land Appreciation Tax

    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 tax payers.

    (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 the reform, 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; Set up 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.