Taxation reform is a big headache among governments of many countries, as it touches on very complex interest chains.
For China, reforms are inevitable as the current fiscal and taxation system no longer suits today's economic and social development, and such reform can't afford to wait any further.
The Chinese economy is currently faced with many problems, such as overcapacity, extensive mode of development and a slowing growth rate. The Central Government hopes to have these problems solved through a series of economic reforms. Taxation reform is recognized as the most important element in economic adjustment. Such reform requires not only government determination, but also scientific planning and precise discussions. It must suit the country's current economic development and also conform to the demands of people from various classes.
The existing fiscal and taxation mechanism was established in 1993 via a "tax sharing system", which divided Central Government and local authority rights on collecting and spending different taxes. As a result, the Central Government's administrative power has declined in some areas while its fiscal and financial powers have risen, with the situation turning out the opposite at local level.
Over the past two decades, due to the "tax sharing system," the Central Government's fiscal revenues have expanded, more of which could be used to support backward central and western regions, contributing to the sustainable development of the Chinese economy.
However, some local governments have to make more efforts to raise funds needed for regional development. Accumulating local debts have begun to affect financial stability. Local government enthusiasm related to investment has furthermore led to extensive economic development and overcapacity among many industries. Thus, taxation reform becomes important in transforming a bubble-infested economy into an intensive, sound and sustainable one. The new taxation system should be conducive to structural optimization and social fairness.