China expands tax cut to raise domestic demand

Government of China has decided to introduce tax reforms in an attempt to boost economic growth. The aim is to stimulate domestic demand to keep the economy growing amid the European credit crisis. The government has already adopted on a trial basis a new value-added tax for such sectors as transportation in Shanghai and Beijing, China Daily reported. The new tax replaces the business tax. Along with a rate reduction the government has offered a tax incentive. The government recently held a meeting to review this trial tax reform. Officials from Shanghai reported the new tax reduced the burden for the target industries by as much as 2.5 billion dollars since last January. They say this resulted in a more than 10% growth in service industries. In light of this, the Chinese government has decided to expand the new tax to various service industries nationwide. Worries about inflation have made Chinese officials reluctant to introduce strong monetary easing or huge public investments to stimulate the economy. Observers say the Chinese government sees the new tax system as means to maintain stable growth while avoiding the risk of inflation.