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The latest consumption tax adjustments reflect the Ministry of Finance's cautious, pragmatic approach to taxation reform.

The new levies on fuel oil, some wooden products and luxury goods will mean a bigger role for taxation in promoting conservation and in wealth distribution readjustment.

But fiscal policy designers refrained from going too far in using taxation to achieve these policy goals.

Many items originally proposed as subjects of consumption tax did not make the final list. The ministry restricted the items to a scope where there was a consensus for the levy.

Some items, such as high-end furniture and garment and consumption at karaoke shops, were dropped due to practicality problems.

This is fair, as tax should be an auxiliary tool for economic managers.

Employment and stimulation of domestic demand, both sensitive to tax changes, are also on policy makers' agendas.

A fine balance should be achieved.

Overly aggressive tax policies could be counterproductive if they create confusion and distortions.

The announcement on Tuesday about consumption tax changes also indicated that the finance ministry has opted to de-link reform of consumption tax and value-added tax (VAT).

This is a realistic decision.

While the progress of VAT reform has been slower than planned, there is no reason to postpone changes to consumption tax as well.

Both consumption tax and value-added tax are products of the country's 1994 overhaul of its taxation system. A major aim of the massive change 12 years ago was to put in place a system that suited the emerging market economy.

Since then, the system has remained basically unchanged.

But as policy goals and the economy itself have developed, the need to modify the system has become increasingly evident.

For one, the current VAT system is thought to discourage innovation, as enterprises cannot obtain tax rebates for purchasing new equipment.

VAT reform is likely to lead to deceased tax revenues, but introduction of new consumption taxes has the potential to increase revenues.

With this in mind, VAT and consumption tax reforms were originally meant to be packaged together, with the hope that the latter would compensate for the losses in VAT.

But VAT reform experiments in northeastern provinces, while achieving some of the expected goals, were not successful enough to prompt policy-makers to spread the reform nationwide.

Policy-makers appear to have gradually given up the idea of using new gains from consumption tax to make up for the predicted decline in VAT.

Indeed, unless the items for consumption tax are drastically expanded and high rates stipulated, it is impossible for consumption tax accounting for just above 6 per cent of total tax revenues to shoulder this task.

In addition, changes of consumption tax should not only be about rate rises and new levies for more goods. Tax rates for some products should be reduced, as we now see for small-engine cars.

Fiscal policy makers' approach to reform is commendable. This approach is in line with the paramount goal of tax reform boost development in the long term with no major fluctuation in revenues in the short term.

(China Daily March 23, 2006)