The Digital Leap: How Tax Reduction Policies are Shaping Business Transformation in China

The study by Yao Wang and Zhijie Kang examines how tax reduction and fee reduction (TR-FR) policies in China have significantly supported enterprises' digital transformation by easing financial burdens and encouraging investment in technology. The research highlights that while TR-FR policies offer critical support, businesses must strategically leverage these benefits for long-term competitiveness and growth in the digital economy.

A research paper by Yao Wang and Zhijie Kang from Xinyang Vocational and Technical College in China explores the significant influence of tax reduction and fee reduction policies (TR-FR) on the digital development of enterprises. Since the Chinese government incorporated structural tax cuts into its fiscal policy in 2008, these policies have played a pivotal role in bolstering economic resilience, especially during times of crisis, and have fostered corporate digital transformation. This study delves into how these policies have aided enterprises in achieving technological advancement and increasing their competitiveness in the market, ultimately promoting the country’s broader economic goals. The authors utilize an evaluation method combining AHP (Analytic Hierarchy Process) and DEMATEL (Decision Making Trial and Evaluation Laboratory) to assess the degree to which TR-FR policies have impacted digitalization in enterprises and the subsequent policy-driven transformation in sectors that increasingly rely on digital technologies.

TR-FR Policies in Times of Crisis

The paper highlights how China's economic landscape has been shaped by external challenges such as the 2008 global financial crisis and the more recent COVID-19 pandemic. In both cases, TR-FR policies served as critical tools in stabilizing the economy. During the 13th Five-Year Plan period (2016–2020), these measures resulted in tax cuts and fee reductions amounting to over 7.6 trillion yuan, and between 2019 and 2020 alone, tax cuts contributed to 4.86 trillion yuan, roughly 2.4% of China's GDP. These reductions relieved businesses of financial pressures, stabilized employment, and laid the foundation for future growth. The study argues that these fiscal interventions have created an environment conducive to digital transformation by allowing businesses to channel freed-up financial resources into technological advancements.

Categorization of TR-FR Policies

The authors categorize TR-FR policies into four types: stimulating TR-FR, relief TR-FR, universal TR-FR, and institutional optimization TR-FR. The stimulating TR-FR focuses on adjusting tax policies to promote industrial restructuring, investment, and employment. Relief TR-FR provided temporary tax relief to businesses affected by major events such as the 2008 Wenchuan earthquake and the COVID-19 pandemic, thereby aiding the recovery of local economies. Universal TR-FR measures, such as reductions in social security rates and administrative charges, had a broader application across various sectors, promoting a sense of stability and growth potential across the entire economy. The institutional optimization TR-FR involved more significant structural tax reforms, such as expanding the scope of VAT and adjusting individual income tax systems, which contributed to long-term economic stability and efficiency.

Framework for Digital Development Evaluation

The paper goes further to establish a framework for evaluating the level of digital development in enterprises by looking at four critical dimensions: strategy, operation, technology, and management. The strategic aspect examines the role of digital transformation in enterprise strategy formulation, high-level participation, and decision-making. Operation focuses on the transformation of R&D, marketing, production, and service models toward more digitized processes. The technological component analyzes the development and implementation of IT architecture, data management, and security systems, while the management dimension considers the organizational structure, talent management, and digital culture.

AHP and DEMATEL: Measuring Digital Transformation

Using AHP and DEMATEL, the researchers assess the interrelationships between these factors to understand how TR-FR policies facilitate digital development. The AHP method helps quantify the relative importance of various factors that contribute to enterprise digitalization, while DEMATEL provides a deeper understanding of the causal relationships between these factors. The combination of these methodologies gives a comprehensive view of how different elements of a business are impacted by TR-FR policies, particularly in their digital transformation journey.

Leveraging TR-FR Policies for Technological Growth

One of the key findings of the study is that TR-FR policies significantly increase the financial resources available to businesses, allowing them to invest in digital technologies and infrastructure. This financial relief not only improves their ability to compete in a fast-evolving digital marketplace but also contributes to the broader goal of national economic stability. The reduction of taxes and fees means businesses can afford to upgrade their digital equipment, enhance IT infrastructure, and improve data security, all of which are essential to modern digital transformation. Moreover, the study emphasizes the importance of developing digital talent and suggests that companies should collaborate with educational institutions to address the current shortage of skilled IT professionals.

Additionally, the research underscores that while fiscal policies like TR-FR play a supportive role, the actual success of digital transformation depends on how enterprises utilize these benefits. Enterprises must not only make strategic investments in technology but also cultivate a culture that fosters innovation and digital literacy. By investing in digital capabilities, businesses can boost productivity, streamline processes, and increase their market competitiveness.

The study offers valuable insights into the far-reaching benefits of TR-FR policies in China. It highlights how these policies have eased financial burdens, allowing businesses to prioritize digital development and remain competitive in an increasingly digital world. However, it also stresses that businesses need to be proactive in aligning their strategies with these fiscal policies to fully leverage their potential. The combination of tax incentives and a focused digital transformation strategy could yield significant long-term benefits for both individual enterprises and the broader Chinese economy.