A new policy guideline for the semiconductor industry is expected later this year, as China looks to the sector as a core part of its high-tech strategy.

Li Ke, an official with the China Semiconductor Industry Association, said the National Development and Reform Commission has organized a fresh round of consultation with experts and ministries, to figure out a policy for the development of the semiconductor business. The consultations have been held over several rounds, and ministries and organizations are now thought to be quite close to reaching an agreement on the guideline.

In 2000, China announced a guideline to encourage the development of the semiconductor and software industries, but plans for a value-added tax (VAT) reduction sparked angry complaints from the United States, Japan and the European Union.

The guideline said the VAT burden of semiconductor companies in China should not exceed 3 per cent, but it was believed to give an unfair advantage to domestic products over imported products, which are required to pay 17 per cent VAT.

Although China claimed the actual tax burden was different to the tax rate, the government agreed to scrap the proposed VAT reduction.

However, semiconductors, known as the heart of modern technology, are such a high priority that since 2004 the government has been considering new measures to support the semiconductor industry, without infringing the World Trade Organization's principles.

Li said yesterday that there are several drafts of the new measures and the government wants to formulate a mid-term plan for the industry, which will guide it over the coming five years.

One key component is a business income tax exemption and reduction.

Under the current Chinese taxation system, foreign-invested companies pay no income tax in the first two years after they begin to make a profit. In the next three years, the income tax rate is halved.

(For more biz stories, please visit Industry Updates)