New tax cuts to spur economic dynamism were approved at the State Council's executive meeting, presided over by Premier Li Keqiang, on April 19. Wednesday's meeting produced a series of tax measures, which are expected to cut taxes by 380 billion yuan this year.
The nationwide value-added-tax reform will have a flatter structure. Starting in July 2017, four VAT brackets will be streamlined into three, with tax rates of 17, 11 and 6 percent on different products. VAT rate for agricultural products and natural gas will decrease from 13% to 11%. For the agricultural product deeply processing enterprises, the tax rate will be unchanged, to avoid higher taxes due to lower input VAT.
There is hardly agricultural product in viscose industry chain, but cotton as the biggest opponent of VSF does belong to agricultural product. According to new measure of the State Council, VAT for cotton will decrease to 11%. The uncertainty is that whether cotton textiles could remain tax rate at 13% as deeply-processing agricultural products and how the discrepancy of 2% could be made up.
Chinese commodity prices mostly include tax and 2% tax cuts means the same decrease of cost. Take current cotton price close to 16,000yuan/mt for instance, the cost will decrease more than 300yuan/mt after tax reduction. By then, the falling cost may convert to lower price. Of course, cotton price is largely decided by supply and demand instead of cost.
The prevailing price of VSF will have downward pressure in terms of competition with cotton, but VSF as industrial product will not see tax cuts, so the reduction of VAT rate will exert negative impact on profitability of VSF companies.
Another uncertainty is whether cotton target price in 2017-2019 set before will change due to new tax cuts. After all, if cotton enjoys more subsidies on falling price resulting from tax cuts, double subsidies are available for cotton, from the aspect of finance.
With the process of reform and opening up in China, agriculture as an industry being suppressed is necessary to have tax cuts for the long-term view. VSF industry has no reason to complain unfair taxation as it enjoys more preferential policy than cotton in terms of export tax rebate after all. VSF companies need to understand that the competitiveness of cotton will be promoted by tax cuts.