The impact of the global financial crisis on Broadly Based Indirect Taxation: a Chinese case study

Abstract

The global financial crisis (GFC) has brought unprecedented challenges to the world economy and numerous demands for regulatory improvements of its financial architecture. China has not been immune from these challenges. Their impact upon its domestic economy has been profound. Like many countries that developed broad stimulus packages to combat the effects of the GFC, China embarked upon various changes and reforms to its taxation system. In the past two years, reforms included structural and targeted tax reductions (corporate taxation and Consumption Tax, CT) and a significant shift to move China’s most important indirect tax (Value Added Tax, VAT) towards a consumption-type system. To what extent are these reforms directly responsive to the effects of the GFC? Using China as a case study, is it possible to propose an effective universal tax response to financial turmoil or economic difficulties generally? Although scholars have argued that, from a tax policy perspective, the conclusion must be that manipulating tax rates as a source of subsidizing finance for distressed business is ill-conceived, does this hold good in China’s case which is now only developing a fully mature tax system and whose recent reforms might best be evaluated as key steps in its long-held desire to simplify its taxation system, move towards a broader tax collection base, lower tax rates and enhance tax collection? This article seeks to answer these questions. It concludes that some targeted tax reforms in economically stressed times can be implemented swiftly and produce immediate and positive benefits. In this regard, particular attention is paid to China’s indirect taxation system, especially the imposition of VAT and CT, since this is critical to its overall tax collections (providing more than half of the taxation revenue obtained by the Central Government) and which directly impacts upon the consumption of all manner of goods.