Taxing times

To rescue finances local governments put the squeeze on small businesses

Taxing times

Ignoring him: Adam Smith

Back in 1776, Adam Smith highlighted how a tax system needs to be consistent. It was essential, Smith argued, that people knew how much they had to pay and when they should pay it. It also kept the tax collectors honest, Smith said. Otherwise the uncertainty “favours the corruption of an order of men who are naturally unpopular”.

The taxmen of Wenzhou won’t be overly familiar with what The Wealth of Nations has to say about their chosen profession. But they certainly feel unpopular at the moment. Businesses are complaining that they are being pressured to pay taxes in arrears, have been overcharged for their current bills, and are even being harried to pay some of their taxes in advance.

For instance, the manager of a clothing company in Wenzhou told 21CN Business Herald that he had received a bill to pay VAT in advance of sales. By way of explanation, the tax department mentioned that it was yet to reach its first-half revenue target and that it needed the company’s help. While refreshing in its honesty, the call for advance payment has hardly endeared the department to the businessman.

Another boss told the newspaper that companies were facing a series of additional audits, as the authorities looked to clamp down on tax evasion.

Wenzhou’s tougher stance is motivated by a slowdown in its fiscal income. In the first half of 2012, local tax revenue was almost flat year-on-year at Rmb14.8 billion. Non-tax income shot up 20%, but people complain that this was entirely due to an increase in fines – such as the overzealous issuance of parking tickets.

This is an extreme example of a national problem. In the year up to July, China’s public finances rose by 11.6% (which the Ministry of Finance put down to lower corporate profits and the previous introduction of tax cuts). But during the same period, public expenditure rose by 23.4%.

Local governments are facing their own double whammy. Already short of cash to cover some of their existing expenses, they are also expected to source new capital for the slew of infrastructure projects now envisaged as part of China’s latest effort to stimulate growth.

Officials from several cities have announced ambitious spending plans in recent weeks, amid widening scepticism about how they will fund it (see WiC162). Then again, perhaps the news from Wenzhou indicates the new strategy – squeezing small companies to pay more tax, even on revenues not yet earned.

The problem is that this newly enthusiastic tax collection comes at a time when businesses are already feeling the economic pinch. Profits at Wenzhou businesses fell by 19% in the first five months of the year, reports 21CN, but at the same time their tax bills went up by 1.9%.

Companies dependent on export markets are among those hardest hit, with orders from abroad diminishing. As the Financial Times points out, overseas buyers are also postponing payment by up to three months. This is hitting cashflow at a time when the local cost of labour and power is on the up.

The situation seems to be at odds with the central government’s repeated expressions of support for SMEs. “Companies are facing rising difficulties in production and operations,” an official from the Ministry of Industry and Information Technology told Xinhua last month, before going on to suggest taxes for small companies should be cut further in order to stabilise growth. Indeed, Xie Xuren, the finance minister, warned in August against levying “overdone taxes”.

What this demonstrates is the growing disconnect between Beijing and the localities. Central government has made clear it wants tax cuts for SMEs; meanwhile it is largely being ignored by city officials who are following their own (self-interested) agenda and doing quite the opposite.

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