Starting Sept. 1 until the end of 2020, China will exempt value-added tax (VAT) of interest income from loans of financing institutions to smaller firms. China's finance ministry released the good news on Thursday on its website.
Reports said that interest income from loans that have a lending rate lower than or equal to 150 percent of benchmark lending rate will be exempted from the VAT. The ministry added that interest earned from loans with a lending rate higher than 150 percent of benchmark will be charged with the current VAT policy.
China has been reforming its tax policies for banks other financial institutions to encourage lending to small firms. It is the country's latest move to support its economy amid the continuing tensions with the United States.
The country had imposed a series of new policies in recent months to ease financing constraints for small and private businesses. These businesses are vital to the country's economic growth and they play a big role in the employment rate of the country.
The ministry said that the loans to be exempted from Vat should be less than 10 million yuan ($1.46 million). It added that interest income from loans gathered from small firms at a rate that is no higher than 6.53 percent are Vat exempted based on the one-year standard lending rate of 4.35 percent.
The ministry also stated that tax exemptions will be enjoyed by eligible institutions that have annual loan growth for small firms higher than their over-all lending growth.
According to Yi Gang, governor of China's central bank, they will assure that they will further improve its policy transmission mechanism so that they could improve financing support for smaller firms.
China has been taking steps to keep liquidity channels relatively loose as the country endures the growing pressure on its economy over the past few months. The country makes changes to its policies amidst fears that the US-China trade war might make a large impact on the country's growth.
It was reported that the central bank has cut reserve requirements for financial institutions for the third time this year to boost liquidity. They are expecting further reductions as they strive to stabilize the economy. However, commercial firms are reported to remain reluctant in lending loans to small and private first because they are considering it to be riskier than lending to state-owned firms.
