Tax cuts 'could be prelude to fiscal policy switch'

China's decision to extend tax cuts to more micro and small businesses may herald a more proactive fiscal policy this year amid unprecedented downward pressure, according to economists, while some traders feel more can be done to help them.

The State Council, China's cabinet, decided on Wednesday that from this year until the end of 2017, companies with annual taxable income of less than 200,000 yuan ($32,573) will have their corporate income tax rate halved to 10 percent. Previously, the threshold was 100,000 yuan.

Vice-Finance Minister Shi Yaobin said on Friday it is the fourth time in the past five years that tax breaks have been expanded for micro and small companies, which contribute more than 70 percent of jobs created in China each year.

Shi estimated that another "few million" companies will be able to benefit from the latest tax break. Data show that under the 100,000 yuan threshold, 2.46 million small firms benefited from the corporate income tax break.

The State Administration of Taxation said that by considering another policy that exempts business tax and value-added tax for companies with monthly revenue of less than 30,000 yuan, the combined tax break for them until Dec 31 is worth 61.2 billion yuan.

Shi said that by taking into account a cut of more than 40 billion yuan in various fees, small businesses' tax and fees burden has been eased by more than 100 billion yuan.

Media reports described the package for micro and small companies as "New Year red envelopes", a reference to the packets sent traditionally during Spring Festival.

Tom Orlik, a Bloomberg economist, said: "The intention appears to be ratcheting up support for growth and underpinning employment, without engaging in another stimulus splurge. It's significant that this is the first policy announcement of the Chinese New Year - setting the tone for 2015."

But Ai Shengming, who runs Zhejiang Moon Jewelry Co in Yiwu, Zhejiang province, said, "The threshold has been doubled, but meanwhile labor costs have also doubled." Ai hopes the threshold can be extended to 500,000 yuan for most small and micro enterprises.

Moon Jewelry's sales volume was more than 30 million yuan last year, 15 percent down from the previous year.

"I think the tax policy could be more diversified to arrive at different levels according to sales revenue. Companies making more money could pay slightly higher tax than less successful ones," Ai said.

Qian Shaotian, a sales manager at Shanghai Yuanzong Hardware Co, said, "Paying tax has been a heavy burden for us, while overall expenses have also made life difficult, with slim hopes of bouncing back soon."

The company, which has focused on manufacturing and trading hardware products for clients mainly in Europe for the past two decades, saw gross sales of about 18 million yuan last year.

Qian said small and micro-sized companies would prefer further reductions to value-added taxes, rather than minor adjustments to income tax.