Ministry of Finance Announces New Policies Favoring Rural Financial Institutions

Ministry of Finance June 7, 2010

May 27, 2010
Ministry of Finance

“This release is important because it reflects how the government is finally beginning to realize how expensive and difficult it is to fund rural lending in general. This tax reduction thus clearly shows the government’s recognition to alleviate the tax burden on these banks that support rural lending. For the ABC and other rural lending banks, this is simply part of the government’s carrots-and-sticks in balance-performance versus social responsibility.”

- PlaNet Finance China Executive Director, Gabrielle Harris

For years, rural financial institutions have been urging the government for regulatory support in their services. Therefore, in accordance with the Central Government’s push to support and develop rural areas, the Ministry of Finance and State Bureau of Taxation jointly announced on May 27, 2010, a retroactive tax cut as of January 1, 2009 in response to the difficulty for rural populations to receive financial services. Some of these policy changes include:

  • Sales tax on interest income from small loans to farmers will become exempt, effective until December 31st, 2013
  • Lower the share of rural financial business’ interest income to 90% of current calculations, effective until December 31st, 2013
  • Lower sales tax on insurance premium income for rural financial institutions (including rural credit cooperatives, village and township banks, rural mutual funds, institutions which engage in microcredit services, city commercial banks etc.) to 3%, effective until December 31st, 2011
  • 90% of the total insurance income shall be computed as taxable for insurance services provided by insurance companies to planting and breeding, effective until December 31st, 2013

Among related financial institutions, one significant player that expects to gain considerably from these regulatory changes is the Agricultural Bank of China (ABC), whose net profits are estimated to grow by billions of yuan per year. Additionally, the tax cuts may improve ABC’s large portfolio of problematic loans, mostly lent to agricultural businesses as mandated by the government. This may improve investors’ prospects for ABC’s initial public offering in Shanghai and Hong Kong, which is expected to be approved in early June and boasts USD 30 billion.

Different experts expressed their projections of influences for such change. Deputy President Quan Longxin of Beijing Rural Commercial Bank believes that although such policy modification signals the government’s shift towards loans for rural areas, it will have minimum influence on rural finance near Beijing, because such microcredit sales taxes are relatively too small to be significant. He also added that if the ministry can further exempt corporate income tax, then banks’ losses will decrease, a benefit which may trickle down to farmers. PFC Executive Director Gabrielle Harris holds back any hasty predictions about the policy’s influence, but highlights that ABC’s performance in risk management and its recent IPO will influence any further tax exempts from the government.

Sources:

http://szs.mof.gov.cn/zhengwuxinxi/zhengcefabu/201005/t20100527_319818.html
 http://online.wsj.com/article/SB1000142405274870426920457526978427097046...
http://business.sohu.com/20100527/n272372749.shtml
http://www.ctaxnews.com.cn/syxw/csjd/201005/t20100526_1560492.htm
http://news.xinhuanet.com/english2010/business/2010-06/01/c_13326672.htm