context: The taxation super-agency will not only be in charge of central and local tax collection, but also the collection of social insurance funds. In practice, this consolidation raises compliance costs for SMEs and makes short-term pain more acute in face of a slowdown.
Starting on 1 September 2018, responsibility for social insurance fund collection will start to be transferred from social insurance bureaus to tax administrations, with the transfer fully implemented by 1 January 2019. While this reform will help replenish social insurance fund shortages and benefit long-term public welfare, tightening collection will significantly raise small and medium enterprises (SME) operation costs, suppress profits, and cut household income in the short term, according to Guotai Junan Securities report.
The reform is premised on two considerations: the large social insurance fund gap and poor enterprise compliance. As society ages, the funding gap will only grow, reaching C¥1.8 tn in 2020 and C¥3.2 tn in 2030, estimates the report. China’s total social insurance fee to wage ratio is 29.29 percent, much higher than the world average 16.26 percent, shows the report. This creates strong incentive for firms, especially SMEs, to evade submission. Social insurance bureaus, on the other hand, are constrained in resources and information to investigate firms’ submissions. For example, an enterprise may register fewer employees and wages in the social insurance system than in the taxation system. Integrating the two systems will mitigate the issue and make it harder for enterprises to arbitrage information asymmetry.
Only 27.05 percent of firms are fully compliant, and firms submitting only baseline insurance account for 31.7 percent of the total, according to ‘2018 Enterprise Social Insurance White Paper’. State-owned enterprises and listed companies align with requirements; most non-compliant ones are SMEs, reports The Paper. Considering the already huge management difficulties facing SMEs, this measure is too drastic and may threaten their survival, argues Qi Chuanjun 齐传钧 China Academy of Social Sciences researcher.