In response to the downward pressure on the economy, the Government Work Report set a target of RMB 1.1 trillion in tax and fee reductions in early 2018. Since then, it has adopted a series of measures to promote the development of the real economy and support scientific and technological innovation, bringing the scale of annual tax and fee reductions up to more than RMB 1.3 trillion in 2018. In the 2019 Report on the Work of the Government, it is proposed that tax and fee reductions being fully implemented are also ensured. Tax and fee reductions directly alleviate the issues facing the current market, and they happen to be fair and efficient policies. In fact, the burden of corporate tax and social security contributions was reduced by nearly RMB 2 trillion last year. With the implementation of the RMB 2 trillion tax and fee reductions policy, local governments have also begun to disclose the result of tax and fee reductions.

On June 12, the State Administration of Taxation and the Zhejiang Provincial Taxation Bureau held a press conference on "Implementing the tax and fee reductions policy to boost Zhejiang's high-quality economic development". In the conference, it was announced that the province had accumulated RMB 43.029 billion in new tax cuts for the first four months of 2019. According to data released by other provinces and cities, in the first four months of this year, the scale of tax reduction in Guangdong reached RMB 67.27 billion. Elsewhere, it was RMB 49 billion in Beijing, RMB 13.7 billion in Sichuan, RMB 8.12 billion in Shaanxi, RMB 7.53 billion in Jiangxi and RMB 3.822 billion in Gansu. According to the latest data released by the State Administration of Taxation, a total of RMB 524.5 billion of new tax cuts were made in the first four months of this year. In the first month of the VAT reform, a net tax cut of RMB 111.3 billion was achieved, and the effect of the tax reduction was significant to say the least.

The manufacturing industry is one of the important targets of tax and fee reduction policies. In this round of VAT reduction, the scale of tax reduction in manufacturing industry ranked first among all industries. In the first month of VAT reform, Zhejiang province had reduced the tax burden of all industries, with a total tax reduction of RMB 9.684 billion, accounting for 8.7% of the total tax reduction nationwide. Among them, the tax reduction effect was most obvious in the manufacturing industry. In fact, 99.21% of the general taxpayers in the manufacturing industry received a tax reduction, which amounted to RMB 4.106 billion, accounting for 47.21% of the total tax reduction, with the tax burden reduced by 31.81%. In addition, RMB 7.101 billion worth of tax reduction was realized in the private economy sector of the province in the first month of VAT reform, accounting for 81.63% of the total tax reduction in the province. The tax reduction policy covered about 98.46% of the private enterprises. On the other hand, the VAT reduction of Guangdong Province reached 27.3%, and the amount of tax reduction reached RMB 13 billion. Among them, the manufacturing industry ranks first in terms of tax reduction. In Guangdong, the province's manufacturing industry reduced VAT by RMB 6.14 billion, accounting for 47.2% of the total value added tax. Computer, communications and other electronic equipment manufacturers also reduced VAT by 990 million, and automobile manufacturers reduced VAT by RMB 630 million. Together, they represent the two industries with the most significant tax reduction effects.

In addition to the policy effect in some provinces, the policy effect of tax and fee reductions should be reflected in industrial data. However, from the latest data from industry in May, it seems that the policy effect of tax and fee reductions is virtually not seen. In May 2019, the added value of industries above designated size increased by 5.0% year-over-year in real terms, 0.4 percentage points lower than in April. On a month-on-month basis, the added value of industries above designated size increased by 0.36% in May. In the first five months of this year, the added value of industries above designated size increased by 6.0% year-on-year. In terms of three major categories, the value added of the mining industry increased by 3.9% year-on-year in May, and the growth rate was 1.0 percentage points faster than that in April. The manufacturing industry grew 5.0%, down 0.3 percentage points while the production and supply of electricity, heat, gas, and water grew by 5.9%, down 3.6 percentage points. Notably, the 5% growth rate was the lowest since February 2002. The manufacturing growth rate, which is an important target of tax and fee reductions policy, also dropped by 0.3 percentage points. On the other hand, under the policy of tax and fee reductions, the profits of industrial enterprises have not improved significantly. According to the data released by the National Bureau of Statistics, from January to April, the total profit of industrial enterprises above designated size reached RMB 1.81294 trillion, down 3.4% year-on-year, which was roughly the same as that from January to March. Among them, the total profit of the mining industry was RMB 173.26 billion, down 0.7% year-on-year. The total profit of the manufacturing industry was RMB 148.364 billion, down 4.7%, and the total profit of the power, heat, gas and water production and supply industries reached RMB 156.04 billion, up 8.0%.

There are two possibilities for unsatisfactory effects brought about of the tax and fee reduction policy. The first is that it might not bring any result, and the second is that the policy effect is lagging behind and it takes a certain amount of time to appear. However, the effects of financial pressure brought about by tax and fee reduction has already become apparent. One June 15, the Ministry of Finance of China announced that from January to May, the national general public budget revenue was RMB 899.19 billion, a year-on-year increase of 3.8%, while the national general public budget expenditure was RMB 930.23 billion, a year-on-year increase of 12.5%. The Ministry of Finance has yet to release data for the month of May. Based on historical data, Reuters reported that the general public budget revenue for the month of May was RMB 1,726.8 billion, a decrease of 2.1% year-on-year. The general public budget expenditure was RMB 1,735.6 billion, up 2.1% year-on-year. At the same time, although the first five months of fiscal expenditure has reached nearly 40% of the annual progress, the monthly growth rate of fiscal expenditure in May has dropped to a single digit growth of 2.1%, much lower than the double-digit growth rate in the previous months.

Anbound's researchers believe that fiscal revenue and expenditure pressures at the local level may be greater. At the same time, preventive measures on debt risks have also caused the local financing environment to deteriorate, which will in turn affect political, social and cadre stability. In addition, the current tax and fee reduction policy also have certain limitations. The current policy is mostly based on the perspective of governmental finance, and has always emphasized on practicing austerity without considering expanding the market and increasing consumption levels. It also did not consider using reform and opening-up to stimulate social investment and consumption. Furthermore, there are also structural issues present in the policy direction, and among that is whether the policy should focus on production or should the focus be on the stimulation of consumption and expansion of space. Looking from the perspective of the final results achieved, focusing on consumption and market space is a better option. This will drive the entire industrial chain and fully exert the role of the market mechanism. If the focus is on the production process, the short-term effect may be realized faster, but under a situation of overproduction, the tax reduction policy may expand ineffective production operations, resulting in greater excess.

Final analysis conclusion:

There are certain policy limitations on current tax and fee reduction in China. If the desired results are to be achieved, the Chinese authorities need the corresponding and supporting policies, especially those that are conducive to the expansion of the market space.