Jin faces taxing task as ministry's role undergoes change

When United States officials were lecturing Jin Renqing about the yuan at the G20 meeting last month, the finance minister could afford to be smug.

The US budget deficit for fiscal 2005, which ended on September 30, was US$318.62 billion, the third-highest on record, bringing the deficit for the 2003-05 period to a startling US$1.11 trillion.

When Mr Jin opens his account ledger, he sees a different picture. Tax revenue in the first nine months reached 2.32 trillion yuan, an increase of 20.4 per cent, meaning that his budget deficit for the year is likely to be below the 300 billion yuan he announced in his March budget.

But he cannot afford to sit back and watch the state coffers swell. His ministry has an increasingly complex agenda as its role in the economy changes. It used to be a passive cashier of the state. But now, it must use tax policies to distribute wealth and resources and stimulate or cool economic growth as required.

This year, it removed export tax rebates on steel, aluminium and other commodities to discourage exports. Next year, it will face a bigger challenge: boosting growth without incurring more debt.

By its own giddy standards, China's economy is slowing.

It is losing steam as higher costs persuade US and European households to buy fewer Chinese computers, toys and television sets. Economists expect gross domestic product growth of about 8.8 per cent in the fourth quarter and 9.1 per cent for the full year, down from 9.5 per cent last year.

In September, consumer confidence in the US, China's biggest export market, suffered its biggest drop in 25 years.

At home, excess capacity haunts most industrial sectors, pushing down prices and profits. In the first three quarters, prices of retail goods rose a mere 0.8 per cent over the same period last year, confirming that producers have little pricing power in the sluggish economy.

Mr Jin will help with tax cuts, a relatively new concept in China. In the past, his ministry issued debt to fund public spending when it wanted to boost growth. Now it prefers to return money to consumers and companies to stimulate consumption.

The clearest example was the recent decision to raise the threshold of individual income tax. From January 1, the minimum income on which people do not pay tax will double from 800 yuan to 1,600 yuan a month under a ruling passed by parliament at the end of last month.

Another move Mr Jin is considering is whether to allow firms to claim value-added tax rebates for their fixed-asset investments. He introduced the exemption on July 1 last year on a trial basis in Liaoning, Jilin and Heilongjiang provinces. The aim is to replace the production-based VAT under which firms pay tax on all inputs they purchase, to one based on consumption, which would exempt investment spending in sectors chosen by the government.

As of the end of October, 40,508 companies in the three provinces had received a tax rebate of 284 million yuan.

Mr Jin wants to implement the tax nationwide, but must obtain a consensus in government and persuade those nervous about a fall in overall revenue.

In cutting taxes, Mr Jin kills accomplishes two things in one go - redistributing income and boosting consumption.

He gave the first major cut two years ago to farmers, whose taxes are gradually being phased out. In his March budget, he reiterated the government's commitment to cutting agricultural tax, with Beijing compensating local governments for revenue losses.

The cutting of the farm tax is an attempt to narrow the widening gap between rural and urban incomes. Farmers no longer pay tax but state revenue from individuals remains robust.

Last year, the government collected 173.7 billion yuan in personal income tax, up 22.6 per cent from 2003 and accounting for 6.75 per cent of tax revenue, up from 1.6 per cent in 1994.

Improved tax collection is a result of public anger at income disparity in a country in which 20 per cent of the population own 80 per cent of its wealth. Stories of the excess wealth of celebrities and tycoons and how they have evaded tax have aroused widespread discontent.

The parliamentary committee that debated the income ceiling at the end of September took the extraordinary step of holding a public hearing for the first time, inviting 20 civil servants, teachers and migrant workers to express their views.