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Tiny profits – tax evasion – false fi- nancial report – distrust from banks– no banking loans – capital shortage – tax evasion, this is an inevitable circle for many tiny and small enterprises. The only way to solve this problem is to reduce the tax burden for small enterprises.
Alibaba Group and the National Development Institute at the Beijing University published the Research Report about the Operation and Financing Situation of Tiny and Small Enterprises in Central and West China. The Report said that 90% of the interviewed companies acknowledged involvement in tax evasion. The tiny and small enterprises in Central and West China are living a hard life and they have urgent demand for financing and burden reduction.
90% involved in tax evasion
“Enterprises are just able to maintain their operation. We worry that our employees will leave when the production is stopped,” said a boss with the surname of Lu. He is the director of an engineering device company in Chengdu. When he received the interview, he was being haunted by the operating difficulties. What’s troubling him more is that “the enterprises have no profits but the tax burden has not been reduced.”
According to the survey, Mr. Lu’s company needs to pay all kinds of taxes applicable for productive enterprises, in addition to all kinds of regional charges. The expenditure from tax accounts for 15% of the company’s operating revenue. In such a bad situation, Mr. Lu can never get rid of losses if he pays his tax according to the law.
Therefore Mr. Lu chose to evade paying the tax. From last year, he did not require the raw material suppliers to provide the invoice of value added tax, because according to the industrial regulation, the issuance of invoice means that he has to pay for the 17% value added tax. Meanwhile, he rarely issued value added tax invoice for his clients unless they had the requirements.
In Mr. Lu’s opinion, there is another important reason for small enterprises like his to evade tax. “The others are all evading paying tax. How can you compete with each other if you do not do this?”
The survey covers 1407 small and tiny en- terprises located in Sichuan, Chongqing, Shaanxi, Hunan and Hubei and it reveals that 90% of them have once taken measures to evade tax.
Evade Tax or Go Bankrupt?
Why do such a large number of small and tiny enterprises in Central and West China try to evade tax?
According to the survey, 60.81% of the interviewed small and tiny enterprises hold the opinion that the tax burden has already affected the enterprises’ operating situation. 33.57% of the interviewed companies think that the tax burden has already taken more than 10% of the companies’ real operating cost and this figure is obtained after taking measures of tax evasion.
The survey suggests that the tax for small and tiny enterprises includes value added tax, income tax, urban construction tax and educational supplementary tax. Then, they need to shoulder the regional educational charges, employment funds for the disabled and other fees that vary to their industries and locations. If they pay all these taxes, their profits, which cannot be said to be large, are heavily damaged. Some small and tiny enterprises need to pay tax even though they have no profits.
This forces many small and tiny enterprises to scratch their heads to evade paying tax.
The survey also suggests that the easiest way for small and tiny enterprises to evade tax is to reduce the issuance of value added tax invoice. Most enterprises prefer to trade with cashes.
But it is impossible to evade all kinds of tax effectively. The survey found that small and tiny enterprises have difficulties in evading or dare not evade paying the regional charges apportioned by local governments with administrative methods.
Meanwhile, the operating pattern of taxation systems in some areas intensifies the stress for the small and tiny companies’ survival, especially when they contract the responsibility of taxation or make quantitative index regardless of the real operating situation of enterprises.
Prof. Zhou Tianyong from the International Strategy Institute at the Central CPC School said that if the current taxation system was not changed, 90% of the small and tiny enterprises in China would collapse sooner or later without tax evasion.
No Tax, No Account; No Account, No Credit
The survey also found that the number of small and tiny enterprises in Central and West China started their production in the first six months of 2012 only accounted for 60% of the number in 2011. 49.04% of these enterprises had seen their net profits drop in the first six months. 72.92% of small and tiny enterprises have the need of financing and 40.58% of them have no ability to receive orders because of their capital shortage.
“The situation of small and tiny enterprises shows that changes are impending,” said Hu Xiaoming, vice president of Alibaba Group.
The solution to this problem obtained from the survey is the tax reduction.
The Report suggests that small and tiny enterprises have already been involved in a strange circle of “tax evasion” and “financing”. Only the tax reduction can lead them through the maze.“No tax evasion, no survival” has become a common method for maintaining one’s existence. However, the tax evasion can only help small and tiny enterprises to retain a small part of their profits, but it undermines their credit scores with no true financial reports, depriving them of the rights to borrow loans from banks to raise capital for their production and operation.