30 May 2018
Tax-to-GDP ratio rebounds again, 2017 fiscal revenue exceeded projections


The replacement of the business tax with a value-added tax (VAT) which began in 2012 reduced the ratio of tax to GDP. China’s government revenue-to-GDP ratio has risen since the tax reform in 1994. Replacement of the business tax with a VAT, which started in 2012, has altered the trend. The tax to GDP ratio fell from 18.6% in 2012 to 17.5% in 2017 and the ratio of fiscal revenue to GDP fell from a high of 22.1% in 2015 to 20.9% in 2017.

However, the growth of tax revenue has accelerated again this year, driven by the VAT and the consumption tax. VAT revenue in January–April 2018 increased 18.4% YoY. The full implementation of the business tax-to-VAT reform in 2016 resulted in tax cuts, but the ratio of VAT revenue to GDP has rebounded since 2H17. The implementation of VAT has made it more difficult for businesses to evade taxes. The use of a new information technology system by the taxation department improved the efficiency of tax collection. Consumption tax revenue in January–April 2018 increased 24% YoY, thanks to faster sales of tobacco and automobile.

2017 fiscal revenue again exceeded projections. Fiscal revenue has exceeded the projected figures in most years since 1994. The situation improved after the 2014 revision to the budget law, but the revenue in general public budget in 2017 again exceeded the projection by 2.3%. Revenue from government-managed funds and social insurance fund exceeded their projected values by even more. Adjustment of the personal income tax threshold lags the growth of household income, causing personal income tax revenue to grow faster than household income.

Surplus in government-managed funds account contributed to the growth of fiscal deposits. The ratio of fiscal deposits to M2 declined in 2015–2016 when the government made better use of idle fiscal funds, but it rose again in 2017. Fiscal deposits increased 19.4% YoY in April 2018. The revenue from government-managed funds became the main source of growth in fiscal deposits. In 2013–2017, revenue from the government-managed funds exceeded the projection by Rmb4trn, resulting in a surplus of more than Rmb2trn. The surplus financed the general public budget deficit and generated more fiscal deposits.

With tax cuts being introduced, the rapid growth of tax revenue and fiscal deposits is likely to moderate. The government plans to reduce taxes by more than Rmb800bn this year, or 4.6% of the Rmb17.3trn fiscal revenue in 2017. It has introduced a number of tax reduction measures since late March. A VAT reform, which will have the largest effect on tax reduction, was implemented on May 1. In a document issued on April 25, the Ministry of Finance urged local governments to accelerate fiscal spending and step up the use of idle fiscal funds. Going forward, the crowding out effect of the fiscal policy will ease.