A Comparative Study on Corporate Income Tax System of FDI in China and India
|School||Zhejiang University of Finance|
|Keywords||China India corporate income tax system FDI METR|
This paper analyzes the corporate income tax system of FDI in China,with India as a reference country, and with the marginal effective tax rate (METR) as an indicator of the effectiveness of corporate income tax system.First, this paper describes evolution history of corporate income tax system of FDI in China and Indian. From the description, we can see that there are many differences between the two countries’ attitudes toward FDI, and also the ways of economic development.Then, this paper comparatively analyzes the two countries’ current corporate income tax system of FDI from three aspects, including the tax liability, tax rates and tax incentives. We find that there are many differences in several major elements of the tax system, including depreciation policy, tax rates, and the way of tax incentives.Finally, this paper classifies the financing into debt financing, the issuing new shares financing , retained earnings financing, and classifies the assets into patents, industrial buildings, machinery and equipment, financial assets, inventories. On this basis, we calculate METR under K-F model. After comparative analysis, the main conclusions are:1. No tax incentives. When there are no tax incentives, the two countries’corporate income tax systems are most advantageous to industrial construction investment. And the overall level of China’s capital tax burden is lower than India, but India’s corporate income tax system is more conducive to attract FDI to invest in patent assets.2. Tax incentives. Under the low tax rate policy, the two countries’overall capital tax burden is lower. However, for comparison, the sensitivity of China’s METR to the income tax rate is slightly higher. Under the accelerated depreciation incentives, after shortening the depreciation period, China’s METR is lower, especially for the corporate with a high proportion of investment in machinery and equipment; after increasing the depreciation rates, India’s METR is lower. Under the tax holiday, China’s METR is significantly reduced, especially for the corporate with higher proportion of retained profits financing and debt financing, and the corporate with higher proportion of investment in patent, machinery and equipment; India’s METR is reduced little, especially for the corporate with higher proportion of investment in patent and industrial construction. Based on the above conclusions, this paper’s policy recommendations are:1. Flexible use of low tax rate incentive. In order to play its due role, China should make the corporate with higher proportion of machinery and equipment investment enjoy low tax rate incentive, such as the wholesale and retail industry, manufacturing.2. Take advantage of accelerated depreciation incentive. China should make the industry which should be supported enjoy the accelerated depreciation incentives, such as high-tech industries, and FDI will be attracted to invest in these industries.3. Flexible use of tax holiday incentive. Tax holiday incentive can significantly reduce China’s METR, especially for the enterprises with higher proportion of investment in machinery and equipment. Therefore, China can take advantage of this policy, and help developing economy.