China unveils tax breaks for banks to spur loans to small firms

Words ‘Made in China’ are pictured on a box of products imported from China at a wholesale shop in Paris. (Reuters pic)

BEIJING: China has unveiled tax breaks for banks and other financial institutions to encourage lending to small firms, in the latest step to support the cooling economy amid rising trade tensions with the United States.

China has in recent months taken a series of measures to ease financing strains for small and private businesses, which are vital for economic growth and job creation.

Interest income from loans by financial institutions to smaller firms, or “micro-loans”, will be exempt from value-added tax (VAT) from Sept 1 until the end of 2020, the ministry said in a statement posted on its website.

Such loans for small firms should be less than 10 million yuan (RM6 million), the ministry said.

Interest income from loans with lending rate no higher than 150% of the benchmark official lending rate will be exempt from VAT, the finance ministry said on its website.

It added that interest earned from loans with lending rate higher than 150% of benchmark rate will incur the current VAT policy.

That means interest income from loans made to small firms at rate of no higher than 6.53% will be exempt from the VAT, based on the one-year benchmark lending rate of 4.35%.

The tax breaks will be enjoyed by eligible financial institutions with annual loan growth for small firms no lower than their overall lending growth, the ministry said.

China’s central bank will improve its policy transmission mechanism to further step up financing support for smaller firms, its governor, Yi Gang, said in remarks published on Wednesday.

Over the past few several months, Beijing has taken steps to keep liquidity channels relatively loose in the wake of growing pressure on the economy amid fears an escalating Sino-US trade dispute could make a significant dent in growth.

The central bank has cut reserve requirements for banks three times this year to boost liquidity, with further reductions widely expected.

But commercial firms remain reluctant to lend to small and private firms, which they consider to be riskier than state-owned firms.