Rioting in the Zhejiang township of Zhili has unnerved the local government, awakening Chinese administrators to the risks of using taxation to drive small-scale businesses out of the marketplace
“Once you have trained a rookie into a skilled worker, he or she will quit to open his or her own workshop.”
Located in the prosperous Yangtze River Delta, Zhili Township, Zhejiang, is China’s primary children’s clothing manufacturing base, accommodating more than 12,200 enterprises and workshops with a total annual sales revenue of over 18 billion yuan (US$2.8bn). The area’s 300,000 residents are mostly employed by small household-run textiles workshops as well as in large factories, which, combined, produce 30 percent of China’s children’s garments.
Smaller, independent businesses in the area were recently targeted by the local government’s tax office, which doubled the so-called “children’s garment tax” levied on small household workshops, termed husband-and-wife teams. Their actions triggered an anti-tax protest on October 26, which soon escalated into a full-blown riot.
According to witnesses, after a brief clash between a workshop owner and a tax collector, hundreds of husband-and-wife teams turned out to protest in front of the local government building. While the protest was in full swing, a white Audi, believed to belong to a local government official, tried to drive through the crowd. Protestors closed in and banged on the hood with their fists. The driver panicked and accelerated into the crowd, injuring nine people, two seriously, which sparked the riot.
In the days that followed, more than 100 vehicles were destroyed and several shops damaged in the second large-scale riot reported in China’s eastern industrial belt this year. The first took place in May in Xintang, Guangdong Province, nicknamed “Jeansville” due to its prominence in the denim industry. Zhili’s small police force was unable to deal with the rioters, and had to call in thousands of police from other provinces to regain control of the streets. 28 people were arrested before the riot ended on October 30.
The intensity of the Zhejiang riot was believed to stem from long-standing tensions between Zhili’s small-scale garment enterprises and the local taxation bureau, with the tax increase acting as a catalyst. After the police had regained control of the town, local media began to probe into the grievances of the region’s independent entrepreneurs.
According to the Zhili taxation bureau, even though business tax on small household workshops has more than doubled, the absolute amount payable was fixed at 636 yuan (US$100) per employee per year, an amount the taxation bureau did not consider “burdensome.” However, workshop owners complained that the taxation standards were arbitrarily set by the local taxation bureau without soliciting public opinion. Some even argued that the tax increase was in violation of tax law.
In fact, arbitrarily determined business taxes levied on small private businesses have been common practice in China since the economic reforms of the 1980s. Given the underdeveloped financial infrastructure at the time, private business taxes were typically paid in cash, leaving no paper trail which taxation bureaus could use to determine appropriate rates of business tax. As a result, the authorities turned to other indicators to gauge turnover, such as the numbers of employees in a private enterprise, to determine an appropriate tax rate. In addition, small businesses would have to pay their business tax in cash, meaning face-to-face collection which significantly increases the likelihood of clashes between small business owners and tax collectors.
After 30 years of economic reform, not much has changed. In 2007, a pilot project was launched to create a national database of small and medium-sized private enterprises (SMEs). However, the database still relied on archaic indicators such as hardware volume, power consumption and the number of employees to determine a company’s tax bracket. The sheer number of SMEs active in China also proved problematic – Gan Gongren, a professor from the Central University of Finance and Economics, told our reporter that national tax authorities simply lacked sufficient staff to carry out comprehensive audits of every one of the country’s millions of SMEs.
No articles in the country’s tax levy management law cover businesses as small as Zhili’s mom-and-pop garment workshops, meaning that local tax bureaus simply concoct a tax rate out of thin air. In Zhili, the fallout was exacerbated by the fact that, prior to 2009, such small workshops were given tax-exempt status to attract business to the area. In 2009, a 100 yuan (US$16) tax was levied on each sewing machine operated by a single workshop, and in 2010, this was replaced by a 300 yuan (US$47) tax levied on each employee (often family members) of a small garment workshop. When the local taxation bureau chose to double the rates in 2011, the decision seemed arbitrary to business owners.
With children’s garments the driving force behind Zhili’s economy, substantially increasing tax on SMEs involved in the industry seems counterintuitive. A tax official speaking on condition of anonymity told NewsChina that the real purpose behind the increased tax was not to enlarge government revenue, but instead to “reshape” the children’s garment industry by driving small businesses out of the market and reinforcing the supremacy of large factories.
Yang Cheng, who owns a children’s garment factory, told NewsChina that the existence of small family-run workshops has substantially driven up wages in recent years. “Once you have trained a rookie into a skilled worker, he or she will quit to open his or her own workshop,” Yang said. “Now the monthly pay of an ordinary worker in my factory has doubled in a year to reach 3,000-4,000 yuan [US$470-627], and the wage of a skilled worker is much higher; 6,000-7,000 yuan [US$946-1,104].”
Moreover, unlike household workshops which paid no business tax prior to 2009 and only a very small amount in 2009 and 2010, larger enterprises bear a much heavier tax burden and have continued to struggle with the rising cost of raw materials. This means the profit margins of large-scale children’s garment enterprises has narrowed significantly. “If the situation continues, we’ll be unable to compete with enterprises in other provinces,” said Yang.
However, many small-scale entrepreneurs argue that the secret to their success lies in greater job satisfaction than can be found in the local sweatshops. Li Chuanting, a husband-and-wife workshop owner and former factory worker, told NewsChina that he had to work 12-16 hours a day as a garment factory employee, but now, with his own workshop, he enjoys much more flexibility and leisure time while maintaining the same income.
According to Yang, a lack of skilled workers forces many larger enterprises to outsource up to 90 percent of their production to small workshops. The latter are good at pirating popular brand-name garments, which has made it very difficult for larger enterprises to profit from their in-house equivalents, an area in which larger factories initially excelled.
“If a certain fashion proves profitable, the market will be flooded with knock-offs in less than a week,” a wholesale shop owner in Zhili told NewsChina.
By increasing the operational costs of husband-wife workshops, the local government has openly waded into this ongoing commercial battle, siding with larger enterprises and this incurring the wrath of small-scale entrepreneurs.
Locals vs. Migrants
But for many small workshop owners, increase in business tax is not only unfair and arbitrary on the part of the government, it is also a way to discriminate against “outsiders,” as most of the husband-and-wife workshops are operated by migrants from neighboring Anhui Province. It is estimated that among Zhili’s 300,000 residents, about 200,000 are migrants, of whom 80 percent are from Anhui. When the local tax authorities resort to coercive means to collect taxes, these tensions becomes intensified, and opposition begins to form along regional lines. During the riots, most destroyed vehicles were those with local license plate numbers. Locals responded by ransacking businesses owned by migrants from Anhui.
In response to the riot, the local taxation bureau fired the tax collector whose altercation with a workshop owner had sparked the initial protests, but have yet to comment on the unpopular tax increase which remains in place. However, the riot and its aftermath have demonstrated to the local government the risks involved in taking sides during a commercial dispute.
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