Good time for tax

The Chinese government should initiate reform on taxing natural resources as early as possible.

The current low tax rate has resulted in problems; it does not reflect the scarcity of resources or the environmental costs associated with most natural resources industries. It also fails to curb waste in using resources.

The low resource tax rate does not help build an energy-saving society.

In 2006 the government planned to reform the natural resource tax system. According to the plan, companies will pay tax based on resource prices instead of the amount of resources the companies take. Connecting taxes directly with prices is expected to increase efficiency in resource use. Insiders expect the rate will be set at 10 percent.

But in 2007 and the first half of 2008 inflation erupted across the country. The rising consumer price index postponed the resource tax reform.

In the past months commodity prices have declined, partly because of the global economic crisis. So it seems a proper time for the reform. But the current economic slowdown makes decision-makers worry that implementing the tax reform now will hurt already-troubled businesses.

Once the taxes are raised, the prices of products such as coal, crude oil and iron ore will surely rise, followed by the price of power, chemicals and steel and eventually by products such as automobiles and ships. The government needs to be cautious.

But the reform will burden businesses and exert an impact on the macro economy whenever it is initiated. It is impossible for decision-makers to find a "perfect time" when such a reform will have no negative effect on businesses.

Now is a good time to start the tax reform. The prices of natural resources have fallen due to slowed economic expansion. So the tax burden will not be as big as it otherwise might, if it is collected based on resource prices. If the cost of energy-consuming products increases, it will prompt companies to upgrade technology to save energy, which is a main goal of the reform.

China Business News

(China Daily 05/11/2009 page2)