China’s private sector is set to receive a significant boost as the government announces an extension and improvement of preferential tax and fee policies for micro, small, and medium-sized enterprises (MSMEs) as well as self-employed individuals. The move comes as part of broader efforts to drive development within the private sector and foster innovation in the tech startup ecosystem.
The Ministry of Finance and the State Taxation Administration jointly released a series of statements on Wednesday outlining the new policies. Among the key highlights are tax cuts and exemptions aimed at reducing the financial burden on qualifying entities and encouraging growth and job creation.
Let’s take a closer look at the main provisions:
- Personal income tax reduction: MSMEs and self-employed individuals with an annual taxable income of less than 2 million yuan (approximately $280,000) will benefit from a halving of their personal income tax. This measure is expected to provide much-needed relief to small businesses and individuals, allowing them to retain more of their earnings for reinvestment and expansion.
- Favorable Value-Added Tax (VAT) rate: MSMEs and self-employed individuals falling under the above income threshold will also enjoy a reduced VAT rate of 1 percent, down from the previous 3 percent. Additionally, taxpayers with a monthly sales revenue not exceeding 100,000 yuan will continue to be exempt from value-added taxes. These VAT adjustments are designed to enhance the competitiveness of smaller businesses and promote their overall sustainability.
- Tax exemptions for lending income: Income derived from loan interest and guarantee fees related to small business entities will remain free from value-added taxation. This provision aims to incentivize lending to MSMEs and facilitate access to much-needed financing, which is crucial for their growth and expansion.
These new policies are set to remain in effect until the end of 2027, providing a stable and supportive environment for MSMEs and self-employed individuals to thrive. According to Xu Wen, a researcher at the Chinese Academy of Fiscal Sciences, the extension and optimization of these policies reflect the government’s strong commitment to supporting small businesses and individual entrepreneurs.
Li Xuhong, director of the academic committee at the Beijing National Accounting Institute, praised the policies for their potential to ease the financial burdens faced by MSMEs and self-employed individuals. For instance, a taxpayer with an annual taxable income of 5 million yuan could save at least 100,000 yuan per year thanks to the favorable VAT rate reduction from 3 percent to 1 percent. Such savings can be channeled back into business operations, further stimulating economic activity.
China’s private sector plays a critical role in the nation’s economy, contributing nearly 50 percent of tax revenue and accounting for 60 percent of GDP. These smaller businesses are also at the forefront of technological innovation, responsible for 70 percent of the nation’s tech advancements, and generate 80 percent of urban employment, as stated by the Ministry of Industry and Information Technology. By supporting MSMEs, the government recognizes the importance of fostering entrepreneurship and creating an ecosystem that encourages innovation and job creation.
In addition to the measures aimed at supporting MSMEs, the Chinese government has also extended favorable taxation policies to venture capital firms and individual angel investors making investments in tech startups. Under these new provisions, investors acquiring stakes in tech startups during the seeding or early stages, and maintaining their investments for two or more years, can deduct 70 percent of their investment amount from their taxable income. This move is expected to attract more investments in the tech sector, stimulating growth and development in emerging industries.
China’s commitment to supporting its private sector through these extended and improved tax policies demonstrates the government’s recognition of the pivotal role MSMEs and self-employed individuals play in driving economic growth, job creation, and technological innovation. By providing tax relief and exemptions, the government aims to boost the vitality of small businesses, improve their operating conditions, and foster a conducive environment for innovation and entrepreneurship.
As the private sector continues to flourish, it is expected to drive economic growth, job opportunities, and technological advancements, propelling China towards a more prosperous future.