The present Chinese income tax mechanism was formulated in 1993 primarily to increase fiscal revenue. NBS figures indicate that from 1994 to 2007, tax revenues consecutively grew at a rate that doubled the growth of GDP, and were much higher than the growth of per-capita disposable income among urban residents. Therefore, the appeal for reducing income tax has never stopped.

As of January 1, 2008, China adopted a new corporate income tax law that reduced the income tax rate for domestic companies from 33 percent to 25 percent. The MOF and some other government agencies have recently launched some financial and fiscal policies to support the development of enterprises, especially SMEs. These policies include raising the tax rebate rate for some textile products, relaxing credit controls for SMEs and establishing special funds for SMEs.

Yang Zhiyong, a researcher at the Institute of Finance and Trade Economics at the Chinese Academy of Social Sciences, told Beijing Review that the reform of corporate income tax has actually begun, and if new tax cuts were implemented, individual income tax is more probably to reduce.

As of January 1, 2006, the individual income tax threshold in China was raised from 800 yuan ($116.79) to 1,600 yuan ($233.58). As of March 1, 2008, the threshold was raised again to 2,000 yuan ($291.97). But with many citizens clamoring for further income tax reductions, the Finance and Economy Committee of the Standing Committee of the National People's Congress issued a proposal in July to raise the threshold. On August 8, Xu Lianzhong, Division Chief of the Price Monitoring Center of the National Development and Reform Commission, wrote an article on the news website xinhuanet.com, making an appeal for another individual income tax adjustment.

Yang said officials should not quibble over the specific level of the threshold when considering further reform of the individual income tax, but they should focus on establishing an adjustment mechanism for the individual tax threshold. They should take into consideration a threshold that is connected to consumer prices, so that growth in tax revenue is in line with citizens' income levels, he said.

Some experts also have called for transforming the VAT, the country's largest revenue-producing tax, from a production type of tax to a consumption type. As a kind of turnover tax, VAT levies charges on the newly added value of enterprises but not on the value they have purchased. But in China the mechanism for production-type VAT is adopted. Because it does not allow enterprises to deduct fixed asset purchases, its tax base is larger than the country's GDP.

In the second half of 2004, the government conducted a trial in northeast China to reform the VAT. As of July 1, 2007, the policy was adopted by 26 old industrial base cities in central China. According to the Department of Finance of Anhui Province, the five experimental cities could reduce their tax revenues by 1 billion yuan ($145.99 million) annually.

"VAT transformation reform has been clearly stated by the government and will be spread to the whole country in the second half of this year or next year," said Liu Shangxi, Deputy Director of the MOF's Research Institute for Fiscal Science, in an interview with China Economic Times.

Liu said the purpose of transforming VAT was to encourage enterprises to upgrade their industrial structure and develop more innovations. By avoiding double taxation, the reform will leave more profits to enterprises. This would be conducive to promoting the growth of SMEs and the economic development of the whole country, he said.