The central government should carry out the value-added tax system reform experiment in Northeast China as early as possible, experts said.

Ni Hongri, a senior researcher with the State Council's Development Research Center, said the current macroeconomic situation, which features fast fixed asset investment, should not be an obstacle deterring the implementation of the tax reform in a timely manner.

The government had originally planned to carry out the reform on a trial basis from April 1 in eight industries such as oil chemicals, auto-manufacturing and metallurgy in the old industrial base. But the plan was postponed due to a fast rise in fixed asset investment during the first quarter.

The central government worried the tax reform plan would further fuel investment, a prominent problem at this time for national economic development.

Excessive growth in some sectors and areas is putting a strain on transportation and power suppliers and driving up the price of raw materials.

"The tax reform plan, which is aimed at attracting companies to invest in the provinces of Jilin, Liaoning and Heilongjiang to revive the old industrial base, will reduce companies' tax burdens," Ni said.

China is practicing a production-based value-added tax system.

Under the system, fixed assets are classified as consumer goods and are subject to the tax.

As a result, enterprises could not claim tax deductions for the purchase of fixed assets such as equipment and machinery.

The system places a heavy burden on enterprises wanting to increase their fixed assets investment, especially for capital and technology-intensive enterprises. The system thus poses a hurdle to economic restructuring.

Experts have suggested the government should replace the present system with a consumption-based one, which allows companies to deduct such a tax when importing new machinery and equipment.

Xie Xuren, director of the State Administration of Taxation, said at the end of last year the government would implement a consumption-based value-added tax system in eight industries in Northeast China as of this year.

Based on the experiences gained from the experiment, the government would then implement the system across the country later, he said.

Ni said the tax reform plan was an important measure taken by the central government to revive the old industrial base.

"More investment encouraged by the new tax plan is helpful for companies' mechanism reforms in the three provinces," she said.

"The government should implement the plan in a timely manner."

The government could take other measures to cool down the current fast rise in fixed-asset investment, she said.

For example, the government could resume levying an adjustment tax on fixed-asset investment in certain industries, which are considered overheated, she said.

Zhao Zhiyun, a senior economist with the Chinese Academy of Social Sciences, said the government would not postpone the new tax plan for a long time.

"The government prefers using monetary measures rather than fiscal and tax measures to adjust the current economic development," she said.

Since the second half of last year, the central government has taken a series of measures to prevent fixed asset investment from growing too much.

These measures include raising the bank reserve requirement, tightening loans to the steel, aluminum and cement industries, and beefing up management over development zones.

The measures would have a great impact on fixed asset investment this year, said Zhang Liqun, a senior researcher with the Development Research Center.

"The country's fast increase in fixed asset investment will come down in the rest of this year," he said.

With a slowdown in fixed asset investment, the country's economic growth will slow down this year, he predicted.

The country's gross domestic product is likely to grow by 9 per cent this year, he said.

(China Daily April 23, 2004)