Leveraging Tax Reductions to Accelerate Digital Transformation in China's Economy

The study explores how tax and fee reduction policies in China support the digital transformation of enterprises by providing financial relief and fostering investment in digital technologies. It highlights key factors influencing digital development and emphasizes the importance of strategic planning and digital talent cultivation.

A study led by researchers from Xinyang Vocational and Technical College in China explores how tax and fee reduction (TR-FR) policies influence the digital transformation of enterprises. Since the global financial crisis of 2008, structural tax cuts have been a key part of China's proactive fiscal policy aimed at stimulating market activity, stabilizing the economy, and supporting businesses in difficult times. These policies have been especially important during moments of economic distress, such as the COVID-19 pandemic, during which China’s government implemented TR-FR policies that reduced taxes and fees by 4.86 trillion yuan, accounting for 2.4% of GDP between 2019 and 2020. The study notes that these policies played a crucial role in easing the downward economic pressure while ensuring the stability of enterprises and securing employment.

Four Key Types of Tax and Fee Reduction Policies

The research outlines four distinct types of TR-FR policies. First, stimulating TR-FR policies are designed to encourage innovation, support investment, and stabilize employment by adjusting tax policies to influence market supply and demand. These policies have facilitated initiatives like the western development strategy by promoting investment and expanding consumption. Second, relief TR-FR policies aim to provide financial relief to businesses that face temporary operational difficulties due to external disruptions, such as the 2008 Wenchuan earthquake and the COVID-19 pandemic. For example, VAT and income tax were reduced in regions severely affected by these disasters, allowing those areas to restore local economies. Third, universal TR-FR policies involve a broad application of tax reductions and exemptions to alleviate the pressures caused by global economic slowdowns. Policies in 2019, such as the reduction of social security rates and the expansion of tax exemptions for small businesses, were designed to create an inclusive policy environment that strengthened market entities' sense of gain. Finally, institutional optimization TR-FR policies focus on reforming the tax system itself by merging domestic and foreign enterprise income taxes, expanding VAT coverage, and introducing permanent tax rebate mechanisms. These institutional reforms have optimized China's tax structure and prolonged the benefits of TR-FR policies.

How TR-FR Policies Fuel Digital Transformation

In examining how these policies support the digital transformation of enterprises, the study highlights that TR-FR policies increase enterprises' disposable income, providing them with the financial resources needed for reinvestment in digital technologies. Furthermore, these policies create a favorable environment for companies to pursue digital transformation, enhancing their competitiveness and ultimately contributing to the stability of the national economy. Despite the importance of government support, the study stresses that enterprises must master and effectively utilize these policies to maximize their benefits in the context of digital transformation. To further explore the link between TR-FR policies and digital transformation, the researchers employed the AHP-DEMATEL method, a combined analytic hierarchy process and decision-making trial and evaluation laboratory technique, to develop an evaluation index system. This system was used to assess enterprise digital development across four main dimensions: strategy, operations, technology, and quality management.

Major Factors Influencing Digital Development

The study's findings indicate that digital development is most influenced by factors such as the degree of industrial chain business collaboration, the productivity of digital products, and the level of IT infrastructure. These factors had a significantly greater impact on enterprise digital development than others. At the same time, while indicators like organizational structure and business model transformation ranked lower in terms of influence, they are still essential for an enterprise's digital transformation process. In terms of digital investment, the study found that enterprises need to increase their financial commitment to digital construction, especially in terms of digital technology and equipment. The government’s TR-FR policies, by reducing tax burdens, allow enterprises to channel more resources into these areas, supporting the acquisition of necessary digital tools and the strengthening of IT infrastructures.

The Importance of Digital Talent in Transformation

One of the key takeaways from the study is the importance of cultivating digital talent to support transformation efforts. Many enterprises face a shortage of high-quality, tech-savvy workers who can lead digital projects. The TR-FR policies create a favorable environment for enterprises to attract and develop such talent by improving wage competitiveness and offering incentives like housing subsidies. Additionally, the study recommends that enterprises form partnerships with academic institutions to foster digital expertise. This would not only benefit businesses by creating a pipeline of qualified digital professionals but also improve the educational outcomes of local universities and increase employment opportunities for graduates.

Strategic Planning and Leveraging Policy Support

The research underscores the role of TR-FR policies in creating an enabling environment for enterprises to undergo digital transformation. These policies provide much-needed financial relief and create the conditions for sustained investment in digital technologies. However, the study also emphasizes the importance of strategic planning on the part of enterprises, which must adjust their investment strategies to align with their digital transformation goals. By using tools like the AHP-DEMATEL method to evaluate digital development and strategically investing in technology and talent, enterprises can better leverage TR-FR policies to achieve high-quality digital transformation and long-term competitiveness.