Tax deduction to improve profitability

China's securities brokerages are being offered deductible items for business tax payments to improve their profitability in the bearish stock market.

According to a circular jointly released by the Ministry of Finance and the State Administration of Taxation, starting from January 1, 2005, securities companies do not have to pay business tax for supervisory and commission fees they collect from investors for the stock exchanges as well as fees for opening stock trading accounts, B share settlement, account transfers, and so on.

Futures brokerages will also have commission fees they collect for futures exchanges deducted from turnover when paying business tax.

The brokerages only gather such fees for exchanges and regulators - instead of using the money as their own income, so the fees should be deducted from taxation, experts said.

The tax break is part of the authorities' efforts to help reduce burdens for securities and futures brokerages and improve their earnings.

It is estimated it will help the country's more than 100 securities companies save about 100 million yuan (US$12 million) of tax payments each year, said Liang Jing, an analyst of securities industry at Guotai & Jun'an Securities in Shanghai.

"It is a friendly signal from the authorities of support for the securities businesses and that more incentives may come out later on," he said.

The authorities have previously already allowed securities brokerages to list deductible items for taxes. The latest tax incentives are a follow-up.

China's securities houses have suffered from declining income from brokering as the stock market remains low and investment sentiment is weak. The securities industry has reported losses for several years.

The tax break will only give the securities sector a little boost, Liang said. It requires more fundamental changes in the structure and management of the securities firms to really turn them around, he said.

Moreover, the new tax policy does not mean much to general investors, who care more about an anticipated reduction of stamp tax, which has been under discussion for years, said Zhu Jianfang, an analyst at China Securities in Beijing.

"Investors are looking forward to something that can really bring them benefits," said Zhu, "Lower stamp tax, for example, can save their costs in trading."

There has been talk in the market that relevant departments have drafted a plan to implement the new stamp tax and may introduce it soon, but it has not been confirmed by the authorities or exchanges.

However, even with tax incentives, market sentiment is still unlikely to be improved immediately, said Zhu.

The root cause for the weak sentiment is that the split share structure remains unsolved, he said.

The existence of a large volume of non-tradable State and legal person shares is like a sword hanging in the air.

Regulators have to find a way to solve the problem and gradually reduce and float such shares while guaranteeing compensation to investors that hold tradable shares, said Zhu.

Without breakthroughs at policy level, it will be hard to achieve major improvements in investors' sentiment, which may be further eroded by the expected slew of public offerings from some large enterprises expected to increase pressure for quick market expansion.

Source: China Daily