Tax Cuts as a Catalyst for Innovation: An Observation on the Implementation of New Tax and Fee Support Policies

　Recently, new tax and fee‑support measures—such as refining the policy on additional deductions for R&D expenses and extending preferential income‑tax policies for small and micro enterprises and individual business households—have begun to take effect. According to interviews conducted by reporters, these tax incentives have alleviated companies’ concerns about ramping up R&D investment, bolstering their confidence in innovative growth. By turning tax‑cut benefits into a driving force for innovation, businesses are accelerating their transformation and upgrading.

　　An institutional arrangement that alleviates concerns about R&D investment.

　　During the survey, many enterprises noted that the additional deduction for R&D expenses is a significant boost to corporate innovation. In particular, the recent policy—under which the government has institutionalized and made permanent the increase in the pre-tax additional deduction rate for eligible industries from 75% to 100%—has alleviated companies’ concerns about ramping up R&D investment and accelerating their transformation and upgrading.

　　“The cornerstone of developing advanced manufacturing is innovation. We must accelerate breakthroughs in critical core technologies and major technological equipment, creating more products and technologies that command global influence,” said Mao Shanwen, General Manager of Zhuzhou Cemented Carbide Group Co., Ltd. “Over the past three years, the company has cumulatively benefited from an additional R&D expense deduction totaling 239 million yuan, which has effectively safeguarded our cash flow and served as a ‘catalyst’ for overcoming technical challenges.”

　　Hunan Shanhe Technology Co., Ltd. has realized its “dream of soaring through the skies” thanks to favorable tax and fee policies. “Tax incentives have provided a steady stream of ‘tax-driven momentum’ for product R&D and technological upgrades,” said Deng Yu, the company’s general manager. In 2022, the company benefited from an additional deduction of R&D expenses totaling RMB 9.1 million, securing the financial resources needed to advance key projects such as a multi‑purpose light transport aircraft with a payload exceeding 3 tons.

　　In recent years, the policy of additional tax deductions for R&D expenses has been steadily strengthened—moving from a 50% to a 100% deduction rate and expanding eligibility from technology‑focused firms to all industries—thereby providing a significant boost to the growth of advanced manufacturing and other enterprises.

　　Nationwide, bolstered by policies such as the additional deduction for R&D expenses, corporate R&D spending has grown at an average annual rate of around 25% over the past five years, fostering a virtuous cycle of “policy guidance–R&D investment–tax incentives–further increased R&D investment.” According to VAT invoice data, in 2021, the sales revenue of enterprises benefiting from the R&D expense additional deduction policy was 1.4 times higher than in 2017, with an average annual growth rate of 24.5%—a pace 9.5 percentage points faster than that of all enterprises.

　　On March 24, the State Council Executive Meeting decided to make permanent the policy of raising the pre-tax additional deduction rate for R&D expenses of eligible industries and enterprises from 75% to 100%. On March 26, the Ministry of Finance and the State Taxation Administration issued an announcement specifying that the measure would take effect on January 1, 2023.

　　“The extension and optimization of the policy on additional tax deductions for R&D expenses, now institutionalized as a long-term measure, has undoubtedly provided enterprises with a reliable ‘reassurance,’ enabling us to advance steadily, swiftly, and sustainably on the path of scientific and technological innovation,” said a representative from Jiangxi Jianji High‑Tech Silicon Materials Co., Ltd. Thanks to the policy allowing a 100% pre‑tax deduction on actual R&D expenditures, the company benefited last year from an additional R&D deduction of RMB 15.49 million, deferred tax payments totaling over RMB 4.6 million, and an additional deduction of RMB 10.68 million under the fourth‑quarter policy for equipment and instruments applicable to high‑tech enterprises. With these savings reinvested in R&D, the company plans to accelerate the development and production of more environmentally friendly dry‑grinding processes for non‑metallic minerals and washed sand, striving to master cutting‑edge technologies and continuously expand both domestic and international markets.

　　A boost of tax relief to ease liquidity pressures.

　　Small and micro enterprises and individual business households are the driving force of development and the primary channel for employment. Fostering their growth is vital to ensuring the steady functioning of the economy and stable employment. These entities have also been a key focus of past tax and fee reduction measures. (Continued on page 2)

　　This year, the tax and fee “package” supporting small and micro enterprises and individual business households is substantial: income tax policies for these entities have been refined and improved; the VAT rate for small-scale taxpayers has been reduced to 1%; small-scale taxpayers with monthly sales of RMB 100,000 or less are exempt from VAT; and taxpayers in the production‑and‑life‑service sectors are eligible for additional VAT credit deductions of 5% and 10%, respectively. Together with existing support measures, these policies will create a synergistic effect.

　　Xinyu Tianheng Fine Wire Technology Co., Ltd. is a small, low-profit enterprise engaged in industrial manufacturing. Affected by the pandemic and other factors, the company’s sales market contracted in 2022. That year, thanks to the preferential policy allowing micro and small enterprises with taxable income of no more than RMB 1 million to pay corporate income tax at a rate of 2.5%, the company received a corporate income tax reduction of RMB 201,700, effectively addressing its most pressing financial challenges.

　　A boost of tax relief has eased the strain on working capital. “At the most challenging moment for our business, the state rolled out a series of favorable tax policies, which gave us a much-needed lift,” said Li Chenghong, the company’s legal representative. “In 2023, the benefits of these national policies were extended: the preferential tax treatment reducing income tax on the portion of taxable income up to RMB 1 million for small and micro enterprises and individual business households will remain in effect through the end of 2024. These reductions translate into real, tangible savings, and with the new year upon us, we’re more confident than ever about our company’s prospects.”

　　Li Xuhong, Director of the Institute for Fiscal and Tax Policies and Applications at the National Accounting Institute in Beijing, stated that both the domestic and global economies are still in the recovery phase, with persistent challenges on the demand, supply, and expectations fronts. Extending several temporary tax and fee relief measures will help smaller business entities—particularly those with limited risk‑resilience—navigate this transition smoothly, safeguard employment and people’s livelihoods, and stabilize the fundamentals of the macroeconomy.

　　A comprehensive package of measures ensures that the path of innovation is more stable, faster, and farther-reaching.

　　“I had expected that, with the carryforward VAT refund process overlapping with the April tax filing period, processing would not be particularly swift. However, the tax authorities promptly established a green channel for us, ensuring that the RMB 10.24 million in carryforward VAT refunds was credited to our account without delay, thereby alleviating our cash-flow challenges.” Recently, Sun Minghua, CFO of Chengde Suke Yinhe Connecting Rod Co., Ltd., completed his carryforward VAT refund application at a newly opened dedicated service window in the tax service hall of the Chengde High-Tech Industrial Development Zone—designed to address taxpayers’ most pressing and urgent tax-related concerns.

　　According to the company, it is a nationally recognized “Little Giant” enterprise specializing in niche, specialized, and innovative fields. To better meet the demands of the new‑energy vehicle market, the company invested 250 million yuan in the first quarter of 2023 to introduce two imported connecting‑rod production lines. While expanding output, the firm faced mounting working‑capital pressures, which threatened its continued operations. “The swift receipt of the carryforward VAT refund has eased our financial strain and provided a strong boost to our ongoing production and business activities,” said Sun Minghua.

　　The third batch of 20 measures to facilitate tax compliance has been rolled out, and specialized policy guidelines on the additional deduction for R&D expenses are being developed. In addition, the measure that reduces the average processing time for normal export tax rebates for Category I and Category II exporters to within three working days has been extended through the end of this year. April marks the peak period for corporate tax filings and payments. According to reports, the State Taxation Administration is seizing this critical window to introduce a series of new service initiatives, ensuring that taxpayers and payers understand the policies, master the procedures, and can fully benefit from them. Meanwhile, fiscal and tax authorities will closely monitor economic developments, strengthen research and prepare policy tools—particularly in support of building a manufacturing powerhouse and accelerating the innovation-driven development strategy—and further advance high-quality economic growth.

　　Wang Zecai, a researcher at the Chinese Academy of Fiscal Sciences, stated that it is crucial to further clarify and streamline the tax system’s continuity and optimization framework, focus on key links and beneficiary groups, ensure policy consistency and stability, and bolster business entities’ stable expectations and firm confidence. To achieve this, it is essential to conduct thorough, evidence-based research that directly addresses the pain points, challenges, and bottlenecks faced by small, medium, and micro enterprises, thereby enhancing the precision, relevance, and effectiveness of tax and fee preferential policies. Only then can we truly foster a virtuous cycle of “providing ample water to nurture fish,” where “more water leads to more fish” and “deeper water yields larger fish,” enabling enterprises to advance more steadily, swiftly, and far along the path of innovation and development. (Reporters: Sun Shaohua, Bai Tiantian)

[Editor-in-charge: Zhou Chuqing]

Source: Economic Information Daily