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Chinese firms say profit margins 'squeezed to extreme' by rising costs

Frank Tang
A bank staff member counts new 100 yuan notes on November 12, 2015 in Beijing, China.
VCG | VCG | Getty Images

Chinese business owners say their profit margins have been "squeezed to the extreme" by rising rent and labour costs – and 80 per cent want taxes and levies cut to ease their burden.

That's according to the results of a nationwide survey of 14,709 companies released on Tuesday, relating to the three years from 2014, by the Chinese Academy of Fiscal Sciences, a think tank affiliated with the Ministry of Finance.

Their sentiments reflect limited progress in the push to "cut costs for business" – one of the biggest economic goals under President Xi Jinping, along with reducing excess capacity and cutting debt levels.

As businesses complain about the tax burden in China – including 25 per cent income tax and 17 per cent value-added tax – the situation is changing elsewhere. In the United States, President Donald Trump is pressing ahead with corporate tax cut plans, while Indian Prime Minister Narendra Modi is pushing the country's biggest tax overhaul since independence.

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The average tax burden of respondents was 5.14 per cent of total business turnover in 2016, the academy said. That was slightly less than the average of 5.32 per cent in 2014.

It found that the combined costs and expenses of the companies surveyed had exceeded their combined revenues in the three years from 2014.

Respondents said rising costs were largely to blame, with raw materials up 7.8 per cent last year, labour costs rising 6.8 per cent, and rents up 9.7 per cent.

Although Beijing has promised to reduce company taxes and charges with a taxation regime overhaul and preferential policies for small firms, the government collected an extra 9.8 per cent in revenues in the first half – compared to GDP growth of 6.9 per cent in the same period.

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Premier Li Keqiang said in March that his cabinet planned to cut the corporate burden by about 1 trillion yuan (US$148.72 billion) in 2017, partly through changes to value-added tax and by slashing administrative fees.

Tang Dajie, secretary general of Beijing-based think tank the China Enterprise Institute, said the actual tax burden on mainland China was heavier than official numbers suggested. "These tax cuts aren't helping companies," Tang said. "It's just a few government surcharges and administrative fees that have been removed."

He added that companies may even end up paying more tax this year as the authorities were getting tough on collection.

The issue of whether Beijing is demanding too much tax from companies came under the spotlight at the end of 2016, when billionaire vehicle glass manufacturer Cao Dewang said production costs in China were higher than in the United States – mainly because of its tax regime.

The country's macro tax burden, the broadest measure, has reached nearly 40 per cent of its gross domestic product, a "deadly rate" for businesses, according to an earlier report by Chinese think tank the Unirule Institute of Economics.