The Impact of Tax Reform on the Tax Burden and Leverage of China's Commercial Banks Muqing ZHANG

Abstract

Research on the Impact of Tax reform on the Tax Burden and Leverage of China's Commercial Banks Muqing, ZHANG Dept. of Economics and Finance The Graduate School Hanyang University Since May 1, 2016, China has fully implemented a tax policy that includes the banking sector in the scope of VAT collection. This measure, on the one hand, aims to perfect China's tax system, bridge the VAT deduction chain, reduce taxes, and lessen the burden on the banking industry, thereby promoting the transformation and upgrade of various industries. On the other hand, it seeks to advance China's goal of structural tax reduction, maintaining strong competitiveness amidst intense international tax reduction trends. Following this, the pace of deepening VAT reform accelerated, culminating in April 2019 with the establishment of the current tax rate structure: a standard rate of 13%, and reduced rates of 9% and 6%. As the lifeline of the real economy, the financial industry affects the survival and development of upstream and downstream enterprises. The banking sector, as an important part of the financial industry, plays a crucial role in capital financing and monetary settlement, and is also a significant pillar industry in the tertiary sector. Changes in the tax burden of the banking industry will inevitably impact the development of the real economy to some extent. Moreover, the issue of high leverage in banks, characterized as 'high liabilities, low assets,' remains a focal point in the financial field. Therefore, it is of great significance to study whether the tax reform-induced changes in tax burden exacerbate bank leverage, especially in formulating financial policies for deleveraging from a tax perspective. Based on relevant tax theories, this thesis sorts out the relevant tax policies before and after the banking tax reform and combines the tax burden status of major commercial banks in China to carry out theoretical and empirical analysis of the tax burden changes and leverage of the banking industry in the process of tax reform. In terms of theoretical analysis, this thesis believes that after the implementation of tax reform, banks can deduct input tax, which is conducive to reducing tax burden. However, due to the low proportion of deductible expenses, banks may not be able to offset the increase in tax burden caused by the increase in tax rate. In the subsequent deepening of tax reform, the basic tax rate of 6% in the banking industry has not changed, but the reduction of tax rates in the manufacturing, construction and transportation industries will change the input tax on the goods purchased by banks, thus affecting their tax payable. In terms of empirical analysis, this thesis uses regression model to explore the changes of tax burden of these 16 commercial banks after the tax reform. The results show that after the comprehensive tax reform, the income tax burden of commercial banks has decreased, and the turnover tax burden has increased slightly. In additional leverage analysis, the corporate tax burden after tax reform had a significant effect on the bank leverage ratio, and the turnover tax burden did not affect the bank leverage ratio. Key words: Tax Reform; Banking Industry; Tax Burden; Banking Leverage Ratio