Current Problems in the Preferential Value-Added Tax Policies for Agriculture, Rural Areas and Farmers and Suggestions for Improvement

Currently there are many, many preferential tax policies concerning “agriculture, rural areas and farmers” (agriculture, rural areas, farmers), such as the exemption of value-added tax on agricultural products sold by agricultural producers from their own production, certain agricultural production materials, qualifying grain and edible vegetable oil, farmers' professional cooperatives, and vegetables, fresh meat and egg products in the circulation stage, the application of the low tax rate to agricultural products, the 13% deduction of input value-added tax on purchased agricultural products, the verified deduction for three categories of products including vegetable oil, and so on. In the course of supporting the development of “agriculture, rural areas and farmers”, these tax policies have played a very positive role, reduced the burden on farmers and agriculture-related enterprises, and promoted agricultural development. But as time goes on, these policies have also shown some problems in implementation, which deserve our attention.

I. Existing Problems

(1) Some value-added tax preferences related to agriculture have not truly been put into effect. The policy stipulates: general taxpayers that purchase tax-exempt agricultural products shall calculate and deduct input tax at 13% of the purchase price. Since value-added tax is an extra-price tax, the value-added tax is entirely borne by the final purchaser; exempting value-added tax is not of great significance to agricultural producers themselves, and is instead more beneficial to agricultural product processing enterprises and other purchasers. For example, after harvesting agricultural products, agricultural producers sometimes carry out simple processing and then sell them. Too much of the raw material processed by these individual agricultural producers is self-produced rather than purchased externally, so they cannot obtain input tax credits. Although tax policy exempts simply processed agricultural products from value-added tax, compared with specialized agricultural product processing enterprises that can deduct input tax at 13% on purchased tax-exempt agricultural products, they bear an extra layer of tax burden. Yet when agricultural product processing enterprises purchase agricultural products, they still press prices down when buying, and after agricultural products are processed and exported, the enterprises enjoy the export tax rebate preference, but the refunded tax is not returned to the vast number of farmers. Another example is the policy stipulation: “The following goods are exempt from value-added tax: 1. Agricultural film. 4. Seeds, seedlings, chemical fertilizers, pesticides and agricultural machinery sold by wholesale and retail.” Taking the Suichuan County National Tax Bureau as an example, there are currently 38 enterprises engaged in the wholesale and retail of seeds, seedlings, chemical fertilizers, pesticides, agricultural machinery and agricultural film. The state applies an exemption policy to agricultural production materials such as feed, agricultural film, agricultural machinery, chemical fertilizers and pesticides from the production stage to the sales stage. The original intention of the policy was to look after farmers' interests and reduce their burden, but in reality, because the prices of agricultural production materials keep rising, the prices farmers pay for agricultural materials are still relatively high, which increases farmers' burden, offsets the effect brought by the value-added tax reduction and exemption, and greatly weakens the effect of the government's pro-farmer policies.

(2) Some agriculture-related value-added tax preferential policies are relatively difficult to implement. From the daily collection and management of our grassroots tax departments, it is not hard to find that quite a few preferential policies are very difficult to implement. For example, Article 15, Item 1 of the “Interim Regulations of the People's Republic of China on Value-Added Tax” stipulates: “The following items are exempt from value-added tax: (1) self-produced agricultural products sold by agricultural producers.” Article 35 of the “Rules for the Implementation of the Interim Regulations of the People's Republic of China on Value-Added Tax” stipulates: “The scope of some tax-exempt items listed in Article 15 of the Regulations is limited as follows: the agriculture referred to in Item (1) of Paragraph 1 means planting, breeding, forestry, animal husbandry and fisheries. Agricultural producers include units and individuals engaged in agricultural production.” When there is both processing of agricultural products (or other activities) and, at the same time, a small part of agricultural production, and the operation is a mixed operation of two or more types, how should management begin? For primary agricultural products such as crude tea and refined tea in tea, one is taxed while the other is not; how should the division and boundary be defined? For forest farmers transferring the ownership and use rights of mountain forest trees, whether the purchaser that buys and resells immediately is an agricultural producer, and whether tax should be levied, all bring great difficulty to tax collection and management.

(3) Some agriculture-related value-added tax preferential policies do not bring real benefits to the beneficiary groups set by tax law. Value-added tax is an indirect tax, and the final bearer of the tax is still the consumer. But in real life, it is not hard to find that although certain industries or products fall within the scope of exemption, consumers in fact do not benefit from it. For example, the “Notice of the Ministry of Finance and the State Administration of Taxation on Issues Concerning the Exemption of Value-Added Tax in the Circulation of Vegetables” (Cai Shui [2011] No. 137) stipulates that, as of January 1, 2012, value-added tax in the circulation of vegetables is exempted. The “Notice of the Ministry of Finance and the State Administration of Taxation on the Policy of Exempting Value-Added Tax in the Circulation of Some Fresh Meat and Egg Products” (Cai Shui [2012] No. 75) stipulates that, as of October 1, 2012, value-added tax in the circulation of some fresh meat and egg products is exempted. But in fact, to this day the prices of vegetables, fresh pork, beef and mutton products, and fresh chicken, duck and goose egg products sold on the market only rise and never fall; the one egg that primary and secondary school students eat every day, and the “vegetable basket” that ordinary people carry, are not easy at all.

(4) The implementation effect of agriculture-related value-added tax preferential policies still deviates. Under the same preferential tax policies, industry development is uneven, and there are relatively large differences among benefiting taxpayers, so that the leverage and regulatory role of tax policy is not obvious. Taking the Suichuan County National Tax Bureau as an example: within the jurisdiction of the county national tax bureau, agricultural producer enterprises developed from 5 in 1994 to 118 in 2014 (including 36 farmers' professional cooperatives, 5 animal husbandry, 25 forest farms, 14 landscaping and fruit industry, 6 seedlings and flowers, 4 farms, 12 tea, and 14 others). On the surface of the development of agricultural producers, in 20 years of development, agricultural producers (enterprises) developed quickly and in large numbers, and it seems they indeed achieved substantial development. But looking at agricultural producers (enterprises) as a whole, development across different industries is uneven. Looking at the development of individual enterprises specifically, the goals expected by national policy have also not been achieved. For example, some agricultural producer enterprises adopt an affiliation method in the name of agricultural producers to carry out production and operation, so as to enjoy the state's preferential policies. Some other agricultural producer enterprises lease or rent other people's land; they themselves do not truly engage in frontline agricultural production, but instead engage in the processing, cold storage and other business of agricultural products, using this preferential policy to achieve the purpose of making profits. Still other agricultural producers do not use the tax reduced or exempted by the state for enterprise development, which greatly reduces the implementation effect of the state's tax reduction and exemption policy and does not play a great role in promoting the development of agriculture, rural areas and farmers.

II. Suggestions for Improvement

(1) Improve the value-added tax preferential policies so that agriculture-related preferences are truly put into effect. Drawing on the practice of foreign countries that do not set up a separate agricultural tax but instead incorporate agriculture uniformly into the urban and rural tax system, China abolished the agricultural tax and brought agriculture and industrial and commercial enterprises together into the scope of value-added tax collection; this practice conforms to China's national conditions and the development trend of tax reform. In order to truly put agriculture-related value-added tax preferential policies into effect, it is suggested that the current relevant value-added tax provisions be adjusted. First, on the premise of stipulating that self-produced agricultural products are exempt from value-added tax, agricultural operators should be allowed to request from purchasers a tax compensation of a certain proportion of the agricultural product price when selling agricultural products; this proportion can be set at 13% of the sale price, or the government finance can subsidize this portion of tax compensation, so that agricultural producers can truly obtain the benefits brought by the value-added tax exemption. Second, value-added tax on agricultural product processing enterprises should no longer be reduced or exempted, but levied at the prescribed tax rate; the tax collected should be turned over in a concentrated way to the national treasury, and the state should uniformly distribute direct subsidies to farmers according to the number of mu, or directly invest a certain proportion in local agricultural infrastructure construction and agricultural science and technology, implementing direct subsidies to farmers and agriculture. Third, while implementing tax reduction and exemption for agricultural production materials and some agricultural products at every stage from production to sales, the prices of agricultural materials should be strictly controlled, and a pricing model of production and operation cost plus a small profit should be implemented, so as to fully reflect the pro-farmer effect brought by the value-added tax reduction and exemption, let farmers and consumers both become true beneficiaries, and promote the effective development of agriculture and rural areas.

(2) When formulating agriculture-related preferential policies, consider both policy realization and the difficulty and risk of practical operation. The original intention of some current value-added tax preferential policies is good; for example, self-production and self-sale of agricultural products, the deduction for purchased agricultural products, and the scope of taxation of primary agricultural products all played a positive role, but tax officials find it very difficult to grasp them in practical operation. Some specific management measures cannot form effective supervision over taxpayers, creating opportunities for lawbreakers to evade tax and bringing tax collection and payment risks. At the same time, the implementation of some preferential tax policies requires close cooperation from other government departments to form a management mechanism of joint management, full cooperation and mutual supervision before the policies can be implemented well. Therefore, at the very beginning of formulating preferential policies, it is necessary to consider in depth the difficulty and risk of policy realization and practical operation, carefully investigate problems that may arise in policy implementation, avoid inconsistency in understanding among grassroots tax departments, and achieve the unity and seriousness of tax law, so as to truly realize the regulatory and guiding purpose of preferential policies.

(3) Agriculture-related value-added tax preferential policies should be made clear down to specific taxpayers and the specific projects they engage in. For example: we believe that the definition of agricultural producers should be made specific and detailed; while carrying out clear tax registration for taxpayers, tax qualification recognition should also be carried out for agricultural producers, with the recognition conditions handled by reference to the method of the “preferential tax policy for employment of persons with disabilities”; when applying for and approving tax reduction and exemption, the following materials must be provided: 1. a written review and recognition document issued by the competent department for a taxpayer recognized by the relevant department; 2. a labor contract or service agreement (copy) signed between the taxpayer and frontline specific agricultural producers (that is, production workers engaged in the production of agricultural products by agricultural producers); 3. records of social insurance premium payments made by the taxpayer for frontline specific agricultural producers; 4. payroll vouchers for wages actually paid by the taxpayer to frontline specific agricultural producers through banks and other financial institutions; 5. other materials required by the competent tax authority. The conditions for not granting qualification recognition are: those who have their own land and lease it out, or who have no land and lease other people's land and then lease it out again, all of whom do not engage in agricultural production themselves but adopt an affiliation method; those who do not have the status of agricultural producers but engage in purchasing business or agricultural product processing business for a long time are all outside the scope of recognition.

(4) Clean up and standardize agriculture-related tax preferential policies that affect fair competition among taxpayers. Current agriculture-related tax preferential policies were gradually formed at different historical stages and according to different objectives, lacking coordination and cooperation among themselves, which makes it difficult to unify at the operational level. As for the subjects that formulate policies, the National People's Congress, the State Council, the Ministry of Finance, the State Administration of Taxation and the governments of all provincial-level regions have all formulated relevant policy documents; the chaos caused by “multiple authorities issuing policies” makes it impossible to shoulder the task of deepening rural reform. Therefore, the current nearly 50 documents on agriculture-related tax preferential policies should be revised, adjusted, merged and simplified, taking industry, sector and product as the principles for preferences, and identity, region, investment subject, business scale and organizational form should not be taken as the principles for formulating preferential policies. Tax authorities must optimize the collection and management process, simplify tax procedures, and establish simple, feasible collection methods that are easy for farmers to master and accept. Taking value-added tax as an example: the formulated value-added tax preferential policies should take industry, product and sector standards as principles, and avoid the influence of factors such as region, investment subject, business scale and organizational form on the application of value-added tax preferential policies to the same enterprise or the same product. It is necessary to re-examine the current value-added tax preferential policies, comprehensively weigh their advantages and disadvantages, and realistically assess the benefits that statutory beneficiaries obtain from various preferential policies. Some transitional preferential measures and preferential policies that no longer suit economic development, as well as preferential policies prone to fraud, must be resolutely cleaned up; those that should be abolished must be abolished, and those that should be standardized must be further standardized. For products and projects that truly need support, the state should restrict the use of direct reduction and exemption methods and replace them with a “levy first and refund later” method, so as to strengthen control over these preferential policies and ensure the smoothness and completeness of the value-added tax chain.