Experts said it was understandable that China offered tax breaks and preferential rates for foreign players when the country's business environment was immature.

But the arrangement is no longer suitable now a market-based economic system is taking shape, said Zhang Peisen, a senior researcher with the Taxation Research Institute under SAT.

China is now at a stage when different rates are detrimental to fair competition, he said.

Deputy Commissioner Wang said the different rates had encouraged domestic firms to disguise themselves as foreign companies to claim the preferential rate, creating further economic distortions.

VAT experiment

Commissioner Xie said the experiment with reforming VAT on equipment needed to renovate enterprises, whereby the percentage of the equipment's price which is taxable is reduced, will be spread to central cities.

The reform is designed to enable enterprises to afford to renovate their equipment.

He added that more time would be needed until the reformed VAT rates could be introduced across the country.

The experiment started in the Northeast in 2004. But financial authorities have been cautious in spreading it to more areas in fear of a major dent in tax revenues.

There are also fears it could further stoke enterprises red-hot enthusiasm for investment.

Proposals have also been raised that the tax on the use of resources such as coal, oil and natural gas should be expanded to cover resources such as water, forestry products and grassland.

As the country's awareness of the need for resource conservation grows, proposals have been raised to increase the rates and scope of the tax.

The need to preserve natural resources is also behind proposals to reform the tax on the use of farmland and, together with worries about a lack of control over the real estate market, driving calls for reform of urban land tax.

(China Daily 01/25/2007 page2)

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