How Will China’s Tax Cut Affect The Manufacturing Industry

On March 5, the second session of the 13th National People’s Congress was opened in Beijing. Premier Minister Li Keqiang proposed in the government’s work report that a larger tax reduction policy would be carried out.

Chinese Prime Minister. Image Source

In the government report, we can see two measures really critical to the future of the manufacturing industry, especially the electronics manufacturers.

  • Implement both inclusive tax cuts and structural tax cuts to reduce tax burden of small and micro manufacturing enterprises;
  • The current tax rate (16%) for manufacturing industries will drop to 13%, and the tax rate for transportation, construction and other industries will be reduced from 10% to 9%.

According to these two measures, each small and microenterprise can save up to millions of tax and use it to improve product quality and upgrade the industry technology, thus making themselves more dynamic.

In this post, we are going to mainly discuss:

  • Why does the Chinese government put forward this tax reduction policy, and
  • How will his policy affect manufacturing companies?

1. Why is this policy proposed by the Chinese government?

At present, the world’s leading electronics manufacturing service providers regard China as an important part of their global industrial layout, and try to expand their industrial scale in China.

That said, many domestic manufacturers have also created opportunities to enter the international market.

In this part, we should focus on the development situation of electronics manufacturing in China, and try to understand what will happen with the new policy, so that we will know the importance of this new proposal more deeply.

1.1 Development status requires policy support

In 2018, the global economy showed a downward trend and the consumer electronics market was weak. China’s electronic information manufacturing industry has limited growth in core products. Many brand manufacturers and supporting manufacturers face an external environment with a declining market share.

That said, the international trade situation and the external economic environment of the industry are complex and changeable. The trend of counter-globalization and trade protectionism tend to be unfavorable to industrial development and the trading environment.

Therefore, the policy of reducing corporate value-added tax came into being, in order to expand domestic demand and support the growth of other markets as a backup for industrial development.

1.2 What will happen with the new policy?

The meaning behind the tax reduction is clear: a substantial benefit to the real economy!

In 2018, the VAT rate has lowered by 1 point, and the result is that all companies have saved 179.4 billion yuan (about 26.74 billion USD) tax fee just within 10 months.

After the reform in 2019, the tax reduction bonus will undoubtedly increase exponentially. According to the government work report, tax reduction reform can “help all companies save nearly 2 trillion yuan (about 298 billion USD) corporate tax throughout the year”.

You can refer to the 3 detailed benefits as follows.

A. The most direct effect of tax cuts is the increase in corporate profitability

The biggest beneficiary of this tax cut is the manufacturing industry with low-profit margins and fierce competition. How to improve profits is the biggest problem facing many companies.

Even the deputy of the National People’s Congress Lei Jun also bluntly said: “The comprehensive net profit margin of Xiaomi hardware does not exceed 5%.”

In addition to financing costs, employment costs, land cost, logistics costs, etc., the tax burden cost is also one of the largest costs a company should afford. As a result, reducing the cost of tax has brought vitality to the development of enterprises.

B. The derivative effect of tax cuts is to secure employment rate

As China’s economic situation continues to change, the pressure on employment situation cannot be underestimated. Therefore, at the end of last year, the Central Economic Work Conference first mentioned “employment priority” and placed stable employment in a prominent position.

Among the top 500 private enterprises in China, manufacturing enterprise is mainstream; also, China’s private economy absorbs more than 80% of urban labor employment and more than 90% of new employment.

By reducing taxes and stabilizing corporate status, not only the vitality of enterprises can be enhanced, but also employment can be ensured.

C. Tax cuts have a certain role in promoting the adjustment of the corporate structure

When the tax burden is light, innovation has more possibilities, and industrial transformation and upgrading have more potential.

It is in this sense that tax cuts are not only the dividends on the account, but also the long-term development dividend.

2. How will the policy affect manufacturing companies?

In this part of the post, we need to pay more attention to the influences of the policy in different industries and companies from the whole world.

2.1 On domestic industries

We take the value-added tax/output tax base as the measure of the actual tax burden of the industry.

The calculation results show that the tax burden of all manufacturing industries will be reduced, and the tax burden of the service industry, agriculture and mining will increase.

Among them, the tax burden of petroleum, coking products and nuclear fuel processed products, food and tobacco, non-metallic mineral products, metal smelting and calendered processed products, textiles, waste scraps and other manufactured products all fell by more than 1 percentage point.

The decline in the tax burden of equipment manufacturing, such as instrumentation, metal products, special equipment, general equipment, transportation equipment, electrical machinery and equipment, communication equipment, computers and other electronic equipment, is also obvious.

Industry Rate Change Industry Rate Change
Food and Tobacco -1.5814% Education 0.1753%
Textile -1.0788% Water 0.3893%
Chemistry -0.9886% Entertainment 0.5298%
Metal Products -0.8702% Accommodation 0.8220%
Transportation -0.7681% Architecture 1.2083%

 

2.2 On foreign companies

Tax reduction is undoubtedly good news for foreign companies. A lower tax rate means that foreign companies can reduce their business costs and even get more sales by lowering the price of their products.

Let us take the automotive industry as an example.

Just after the release of the tax reduction policy, Mercedes-Benz, Lincoln, and Jaguar Land Rover all cut the suggested retail prices for the models sold.

For example, Mercedes-Benz announced that its various models will be reduced in price, among which Smart models will have a reduction of 1,000-2,000 yuan ( about 149-298 USD), C-class and GLC models will have a reduction of 2,000-4,000 yuan (about 298-596 USD), S-class and the Dess-Maybach model will have a decline of 7,000-25,000 yuan (about 1,043-3,727 USD).

Jaguar Land Rover and Lincoln also announced that all of their models will be priced lower in response to policy changes, including Jaguar Land Rover’s maximum price adjustment of 20,000 yuan (about 2981 USD).

All in all, after gaining more revenue, foreign-funded enterprises will also find more opportunities in China to upgrade their supply chains and transform their industrial structure, which will eventually lead to a win-win situation.

2.3 On the supply chain

Some manufacturing companies and commercial enterprises have always been pioneers in the promotion of supply chain management. When the tax cut policy is implemented, companies have more money to develop and expand their supply chain.

At the same time, as consumers begin to pay attention to the environmental issues of the entire supply chain process of the purchased product, including the environmental impact of the product’s raw material origin, production location and distribution process, companies should pay more attention to this issue, so the money saved can be of great help.

Developing a green supply chain strategy means collecting and analyzing environmental regulations, discussing consumer issues with suppliers in the supply chain, researching green supply chain policies; maintaining management measures with consumers and suppliers.

If you are interested in developing a green supply chain or you have some questions, feel free to reach out to us. We, Insight Solutions Global, are always willing to help you out. Reach out and see how we can help upgrade your supply chain, and drive your supply chain performance up to the next level.

That’s all you should know about the latest Chinese tax reduction policy. We hope it’d be helpful! Feel free to leave your comments below, if you have any question.

Note:

  1. We do not own the images used in this post. Feel free to contact us if they belong to you, and we’ll take them down as quickly as we possibly can.
  2.  Statistics from https://wallstreetcn.com/articles/3488540.
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