However, tax system reforms conducted in line with the principle of the combination of the planned economy and market regulation have all along been characterized by a tendency towards the excessive use of the tax system to interfere with market mechanisms. The multiple tax system, which has been characterized by multiple tax categories with multiple levels and multiple taxation, obviously no longer suits the needs of the further development of a market economy. It has thus been quite difficult to allow the system to play its proper regulatory role in handling and distributive relationship between the central and local governments. The major defects have manifested themselves as follows:

1.  The irrational structure of the tax system and the unfair tax burden. For example, enterprise income taxes have been determined in accordance with the differing nature of ownership, i.e. 55 percent for large and medium sized state-owned enterprises, plus the regularity tax. An eight-grade progressive tax rate for excess over specific amounts was adopted for small state owned and collective enterprises, including township enterprises, with the highest rate standing at 55 percent, and the lowest rate at 10 percent. The rate for private enterprises was set at 35 percent, plus a 3 percent local tax. In terms of latter, the tax rate was 24 percent plus 3 percent in coastal economic develoment zones. Another case in point is that the turnover tax was adopted under conditions dominated by planned prices and were disigned to ease the contracdiction resulting from irrational prices. The tax rates, which ranged from 3 percentto 60 percent, were divided in 30 grades, while current prices have for the most part been decontolled. Failure to merge the multiple tax system and readjust tax rates was thus disadvantageous to fair competition among enterprises.

2.  The distributive relationship between the state and enterprises is in a disproportionate interlocking state. In addition to enterprise income and regulatory taxes, the state also collects construction and budetary buffer funds from enterprises engaged in key energy and communications projects. Competent departments of local governments also overburden enterprises as a whole by using various methods to collect considerable administrative expenses and funds. The series of preferential taxation policies which were enacted as part of an effort to solve the actual difficulties of enterprises and thus, to certain extent, adversly affected the solemnity of the tax law and completeness of the tax system.

3.  The irrational division of tax income and management power over taxation is disadvantageous to the thorough implementation of the system of sharing tax revenues between the central and local authorities.

4.  The scope and extent of taxation control fails to meet and demand for allowing production factors to completely enter the market. Tax regulations covering the real estate and capital markets are far from being in place.

5.  Implementation of two seperate tax systems for domestically funded and foreign-funded enterprises has led to increasingly sharp contradiction.

6.  The tax collection and management systems and obsolete methods of tax collection and management have resulted in serious losses of tax revenue. Estimates based on a survey conducted by concerned departments reveal that the total amount of tax revenues lost annually in China is around 50 billion yuan.
The aforementioned problems show that further deepening reform of the tax system is both necessary and urgent.

The guiding principles for the ongoing reform of the industrial and commercial tax system are to unify the tax law, equalize the the tax burden, simplify the tax system, rationalize the division of power, straighten out the distribution system, guarntee financial revenue and establish a tax system which conforms with the requirments of the socialist market economy

Reform should adhere to the following basic principles :
-  Contributing to stimulating the enthusiasm of the central and local governments and strengthening the macro-control capability of the former. It is necessary to readjust the structure of the tax system, rationalize the division of tax categories and set tax rates, thereby laying a solid foundation for implementation of the system of sharing tax revenues between the central and local authorities, and rationalizing the distribution relations between the central and local governments.
- Realizing fair tax burdens, there by cearing conditions for fair competition amongst enterprises in the market. - Helping to develop the role of taxation in regulating personal income and economic development between regions in order to promote the coordinated economic and social development and boost the realization of common prosperity.
- Embodying industrial policies of the state and promoting the readjustment of the economic structure, thereby bring about the sustained, rapid and sound development of the national economy and enhancement of overall economic returns.
- Simplifying and standardizing the tax system, and safeguarding the unity and solemnity of the tax law.

In China's multiple tax, the turnover tax is the main source of tax revenue. The previous turnover tax consisted of the value added tax (VAT), and product and business taxes, with the tax ranging between 3 percent and 60 percent. The present reform focuses on the focusses on implementation of a standardized VAT and appropriately establishing consumption and business taxes. The effort centers on a new pattern of a dual-level turnover tax system based on the VAT as wide- ranging regulation and the consumption tax as special regulation.

- VAT is generally levied on the production, whole sale and retail sales and importation of commodities.
VAT is a type of turnover tax levied on the added vaue factors of the various links between production, circulation of commodities and labor services. The tax overcomes defects in the traditional turnover tax system which were manifest by reductant taxation on sales volume for which taxes had already been paid and further adding one tax amount to another. As a result of the new tax, the same product will be free from the influence of a number of production and circulation links and will always maintain the same taxation content, thereby avoiding the emergence of problems of fluctuating tax burdens on taxable products resulting from changes in production links. At the same time, the new tax maintains the characteristics of the turnover tax in terms of its wide- ranging taxation scope and timely, balanced and stable tax revenues, and thereby demonstrating the principle of the unity between the tax systemm and market mechanisms. Therefore, Vat is widely regarded as a type of neutral tax with a relatively high degree of transparency. It helps organize financial incomes; based on the principle of economic returns it encourages enterprises to select the best form of production, management and organization; facilities the implementation of complete tax reimbursements for export products in line with common international practices; and strenghtens the competitiveness of products on the international market.
VAT was first put into practice in France in 1954, and was introduced to china in the early 1980s.However, due to the limitation of vaious objective reasons, levies of VAT were limited to certain industrial products, and tax rates were excessive. As a resuolt, the VAT was subject to great limitations in terms of properly playing its due role.
In terms of the present taxation reform, VAT becomes the major tax ite4m and as such is the main content of reform. The goal, which is in line with generally accepted international practices and conforms to existing conditions in China, is to establish a relatively comprehensive VAT mechanism in order to meet the requirments of the market economy in regard to the tax system.
- Expanding the scope of taxation. Industrial products which previously subject to VAT and product tax, wholesale and retail commodities, and water, electricity, heat and gas in public utilities which previously paid business taxes, as well as salt which was subject to the salt tax, all fall within the scope of the new VAT.
- All industrial and commercial enterprises engaged in selling products and dutiable labor, as well as various other units and individuals must pay VAT. As part of reform of the turnover tax system, the consolidated industrial and commercial tax has been annulled. As a result, foreign funded enterprises which originally paid consolidated industrial and commercial taxes should also be included in the aformentioned list of those subject to VAT.
- the VAT model adopts a 17 percent basic tax rate and a low 13 percent tax rate. Except for commodities subject to low tax rate as stipulated in tax regulations, other dutiable products and labor service are all subject to the basic tax rate. A zero tax rate is adopted for export commodities, i.e., all tax payments will be refunded following declaration of exports.
- A tax withholdind system is adopted for scheduling the tax in light og the dispatch list.
- Taxable amounts are calculated in accordace with the principle of the purchase tax withholding law.
- With regard to small- scale taxpayers with annual sales income of less than the stipulated amount and whose accounting methods are incomplete, a simple amount and whose accounting methods are incomplete, a simple method for calculating the taxable amount in accordance with the amount of sales income and a 6 percent tax rate is adopted.
- Following the reform, VAT taxpayers who calculate the tax amount in accordance with the standardized method shall be subject to special tax registration and use special VAT invoices. The goal is to establish an auditing system to cross check both the purchasing and selling taxpayers, and strengthen the internal mechanisms of VAT self control to prevent tax evasion and ensure the application of appropriate tax reductions and exemptions.
According to a recent general materials survey conducted by the ministry of Finance, the average turnover tax rate burden on industrial enterprises after reform basically equals that prior to reform. Initial estimates show that in terms of the nation's 282 varities of industrial products, 73 products have sustained increased tax burdens, accounting for 26 percent of the total, while 209 products, or 74 perce4nt, have been subject to reduced tax burdens. According to estimates for 1994, the country's VAT income will surpass 200 billion yuan.

II.  Consumption Tax Levied on Specifed Consumer Goods.

The consumption tax is a new tax category of the turnover tax system resulting from reform. On the basis of a general VAT levy on commodities, a consumption tax is further levied on a small number of selected consumer goods mainly for the purpose of adjusting the consumption pattern, providing guidance to consumers and guaranteeing the country's financial revenue.

In the past, in order to satisfy special needs during different historical periods, the Chinese governmentemployed the method of levying heavy taxes on certain consumer goods. Prior to reform of the industrial and commercial taxation system, the state also levied a relatively high rate of tax on certain consumer goods in the circulation channel, thereby collecting a fairly high amount of VAT or product tax. On the one hand, the approach has helped the state raise funds, while on the other hand it has embodied the idea of "basing a prohibition on levy," which simply means limiting production and consumption by collecting heavy taxes. It is currently a common international practice for relatively high rates to be levied on selected consumer products such as cigarettes, wine and gas, while in some cases a relatively high tax is levied by establishing a seperate tax category.

The selection of the scale of tax levies for the consumption tax considers the following main factors: Firstly, products with a relatively substantial reduction in tax burden as a result of readjustments in the pattern of the turnover tax system; secondly, some high quality, luxury consumer products considered nonessential daily necessities; thirdly, certain consumer goods which are required for keeping fit and protecting the ecological environment, but excessive consumption of which is discouraged and deemed unadvisable; and, fourthly, various special resourceconsumer goods. At present, 11 types of products are subject to the consumption tax - cigarates, wine, cosmetics, skin and hair care products, expensive jewelry, gems and jade, gas and diesel oil, vehicle tires, motorcycles, sedan automobiles, and fire crackers and fireworks.

By design, revenue from consumption tax is income considered apart from the product tax VAT of the original tax system, and apart from the product tax and VAT of the original tax system, and represents a change in the classification of revenue from the old to the new tax system. In terms of the prices of commodities subject to levy of the consumption tax, such commodities were previously subject to relatively high product taxes and VAT. Since VAT is now levied in accordance with a unified tax rate, tax levied on such commodities is less than before. In order to makeup for the reduced tax, the consumption tax was established and is levied separately. However, the change has not increased the overall tax burden on the commodities.

Fourteen different rates of consumption tax have been set for different consumer goods, and the consumption tax is eventually borne by the consumer. However, in order to decrease the number of tax payers reduce the level of charged expenses and guard against lost revenues, the consumption tax payment link is set in the production link.

III  Business taxes are levied on labor transactions, which are not subject to VAT, and on tertiary industry.

Business taxes are a tax category within the scope of turnover tax and taxes are levied on the basis of the volume of business (sales volume) handled by taxpayers who engages in busine4ss activities. The scope of reform in relation to the collection of business taxes can be summarized as two types of business activities - providing labor services and selling immovable assets. Specifically, business taxes apply to nine dutiable projects:
1.   Communications and transportation, including land, water, air and pipeline transportation, as well as loading and       off-loading and eventual transportation.
2.   Construction industry, including construction, installation, repair, decoration and other engineering activities.
3.   Posts and telecommunications, including telegraph, telephone and the distribution of newspapers and magazines.
4.   Culture and sports, including cultural activities, artistic performances and sports competitions.
5.   Finance insurance and pawnshops.
6.   Service trade, including factorage, hotels, catering, tourism, storage, leasing, advertising and other related services.
7.   Transfer of intangible assets, including transfers of land- use rights, patents, non- patented technology, trademark       rights and goodwill.
8.   Sales of immovable property, including sales of structures and other land attachments.
9.   Recreation, including dance halls, music saloo, billiards, golf, howling and amusement.

The general legislative principle for individual income tax adopted in various countries around the world is to regulate gaps in personal income and ease contradictions resulting from major disparities in social distribution. The purpose of the revised Individual Income Tax Law of the People's Republic of China which adopted by the National People's Congress in October 1993 is to ensure that the income taxes are levied on high- income earners, and a lesser or no income tax is levied on medium and low income earners. The revision embodies the principle of preventing excessive increase in tax burdens on taxpayers and ensuring a reduction in the overall tax burden.

As part of an effort to standardize the tax system, the original individual income tax, individual income regularity tax and income tax on urban and rural individual industrial and commercial households were merged and integrated into the new individual income tax which is generally applicable to Chinese citizens and foreign personal earning income within China.

The original tax law consisted of six dutiable items subject to individual income tax, while the revised individual income tax law contains five additional items, including income earned by individual industrial and commercial house-holds from production and operations, income earned by individuals from contracted operations of enterprises or institutions or from leasing, income from loyalties, income from property transfers and occasional income.

China's method of levying individual income taxes is different from those used in Western countries where taxes are calculated on an annual lump-sum basis. China has adopted the method of itemized deductions and fixed rate items, and levies taxes on a monthly, annual or specified time basis. The method of levy was selected in light of actual conditions in China, with the main advantages being that is conductive to the realization of source withholding, and blocking loopholes in tax collection and management. The 5- 45 percent nine- grade progressive tax rate in excess of specific amounts is applicable to the wages or salaries of the taxpayers; the 5-35 percent five- grade progressive tax rate in excess of the specific amounts is applicable to income earned by individual industrial and commercial household options, or from contracted management of enterprises or institutions and from leasing business. All in all the income tax rate for enterprises is applicable to other dutiable tax items, while a 30 percent reduction in the taxable amount may be levied on income from royalties in order to give due consideration to intellectual labor. An additional amount of tax may be levied on exceptionally high income earned as remuneration for non-recurring short term labor services in order to strengthen the regularity dynamics to restrict excessively high-income levels.

With regard to preferential tax reductions and exemptions, the revised individual income tax law stipulated 10 specific exemptions from individual income tax, adjusts three tax free items and adds one tax exemption stipulation, thereby demonstrating the subject to special taxes and those with special incomes.

In line with generally accepted international practices related to exemptions from individual income taxes on basic living costs, the amount of deductions from monthly living expenses remains at the standard 800 yuan as stipulated in the original individual income tax law. The new tax law adds one stipulation in terms of additional reductions for expenses in order to give due consideration to foreign personnel working in China.

Initiation of new tax categories:

Initiation of VAT on land to appropriately regulate excessive profits involving land transactions;

Initiation of stock exchange tax to regulate taxation on the stock market;

Initiation of inheritance tax to appropriately regulate inheritances of property;

Initiation of a social insurance tax to provide fund guarantees for the comprehensive reform of the state social security system.

The effects of the Interim Regulations on land VAT are becoming more pronounced. The VAT is levied on the value of transferred real estate, i.e. the balance of earnings gained from the transfer of state land- use rights, surface structures and other attachments which are referred to as transferred real estate after deducting related costs, expenses and tax paid. The regulation s stipulate that all units and individuals are subject to VAT, irrespective of their economic nature, whether domestic or foreign- funded enterprises, whether Chinese or foreign personal, and whether operating real estate and earn exclusively or concurrently, so long as they operate real estate and earn income from within the territory of the People's Republic of China.

 -  Reformation of the following tax categories ;

Expanding the scope of tax collection for resources to include all mineral resources. Taxable items include crude oil, natural gas, coal, nonmetal raw ores, ferrous metal raw ores, nonferrous metal raw ores and salt. At the same time, China employs the method of calculating taxes from the quantity quota in accordance with the category of products and set the tax value with a range of the upper and lower limits. The tax value will vary with the different resource conditions for the same product.

Reforming the urban land- use tax to ensure it is applicable to both the urban and rural areas, and appropriately increasing the tax value.

Revising the urban maintenance and construction tax in order to make it an independent tax category, and using it as a means of raising funds for local construction.

 -  Readjusted and simplified tax categories : 

Canceling the fair trade tax, domestic animal trades tax, special consumption tax, special tax on enterprises that use petroleum as a principal fuel, the salt tax, bonus tax and wage regularity tax. The special consumption tax and special tax on enterprises that use petroleum as a principal fuel will be incorporated into the consumption tax, with the salt tax becoming a part of the resource tax.

Canceling the urban real estate tax and tax on vehicles and boats and operating license tax on vehicles and boats and introducing a unified housing property tax and tax on vehicles and or boats.

Reforming and relegating and banquet tax and tax on slaughter houses to lower levels, and allowing various localities to decide whether or not to levy such taxes in light of actual local conditions.

Since implementation of these forms, the number of tax categories belonging to china's original consolidated industrial and commercial tax, excluding customs duty and the agricultural tax, has decreased from 32 to some 18, thus has initially forming a highly efficient and simplified tax system.