An employee handles tax levy details at a window in the State Tax Bureau of Haining county, Jiangsu Province. Photo: CFP

Only death and taxes are inevitable, the old saying goes. But new ways of levying more taxes can always seem quite surprising. One enterprising official even used the threat of a war between China and Japan on the Diaoyu Islands to put the squeeze on entrepreneurs.

Li Jianguo, a businessman from Xianxian county, Cangzhou in Hebei Province, was among them. The official told Li that he predicted war was coming after reading the People's Daily, the Beijing News reported in late November.

He was told to pay an extra 70,000 yuan ($11,242) in tax, five to six times his usual yearly tax contribution, and equivalent to 50 percent of his annual profit. He doubted the legality of the move since the bank details provided belonged to a tax officer and not the local tax bureau.

Another businessman from the same county, Zhang Shun, was also asked for money but was spared such a wild tale.

Zhang owns a steel processing firm, a common industry in Hebei. The local tax bureau invited him to a conference in late October, along with other entrepreneurs.

Officials asked them to pay extra taxes for that year, and "reminded" Zhang that otherwise they would check his account books. Like Zhang, most businessmen feared a full inquiry, in case any irregularities turn up.

The extra taxes Zhang and Li were asked to pay have been called an "overhead levy" by experts. It refers to a practice by tax departments, charging enterprises excessive taxes under the guise of various excuses. In reality, they are simply collecting taxes in advance or directly taking in extra taxes.

Can't afford to pay

The Cangzhou local government is breaking the law by charging an overhead levy, Zhang Junwei, director of the macroeconomic research office of State Council Development Research Center, told the Global Times.

Zhang said the tax threshold is already too low, especially for small-sized enterprise, which means they are living under an economic burden. Research by his team conducted in 2011 shows that the tax burden for micro-enterprises is much heavier than those for white-collar employees.

Thus, some enterprises evade paying taxes, which explains why they are afraid of showing their account books to taxation officers, said Zhang.

Besides, enterprises have to find ways to maintain a good relationship with the local taxation departments, so that they can bargain about the amount of tax they pay, all contributing to intangible corruption, he lamented.

In order to pay less than charged, some businessmen use their guanxi (connections) to help in the bargaining process.

"At first I was asked to pay 100,000 yuan. Now I only need to pay 40,000 yuan after using my guanxi. Have you turned to someone for help?" one entrepreneur was quoted as asking his peers by the Beijing News.

"Enterprises should make contributions and pay extra taxes for the past two years since we haven't collected the full quota for 2012," a tax official named Guo told Zhang in his office.

On the official's desk, Zhang caught sight of various pieces of paper, listing at least seven other enterprises and the tax amounts they were to be charged, ranging from 8,000 to 20,000 yuan apiece.

By November, Li hadn't paid the extra tax although the demands were lowered to just 30,000 yuan. "Enterprises are facing a recession, and extra taxes will force us to close down quickly. Who would the government collect tax from if enterprises went bankrupt?" he asked.

Returns on sales in the steel processing industry for September were only 0.82 percent nationwide, ranking the lowest among all industries.

Similar overhead levies were also reported in several other counties in Cangzhou. After media exposure, a senior taxation official from Cangzhou was dispatched to investigate, but no results have been released as of yet.

Pressure from all sides

Financial commentator Ye Tan wrote on her blog that the situation was akin to committing suicide, adding that charging more to enterprises already in dire economic straits will send local economies into a spiral.

Profit margins for small- and medium-sized businesses manufacturing low-end products average out at only about 3 percent, according to statistics from the China National Garment Association.

Thus, many enterprises, especially small- and medium-sized ones, are struggling to make ends due to rising exchange rates and costs, said Ye.

Her concern is shared by Cai Hua, secretary-general with the Zhejiang Business Capital Investment Promotion Council. Clothing is a leading industry in Zhejiang Province.

The phenomenon of asking enterprises for tax in advance has been an apparent one throughout Zhejiang in 2012 due to the economic downturn. The situation could be even tougher for businessmen in Jiangsu, Shandong and Anhui provinces, Cai warned to the Global Times.

What Cai observed has also been seen by tax experts. Charging overhead levies has almost become a tradition in China, rearing its ugly head again at any time of economic downturn.

The last time when overhead levies were commonly seen was back in 2008. Economic growth then fell to 9.1 percent, while the rate of increase for fiscal revenue that year was 19.5 percent. Overhead levies were a major contributor to that rise, reported Phoenix Weekly.

According to the report, experts judge that the practice of overhead levies in 2012 is more severe than it was in 2008.

Local governments are facing a lack of fiscal revenue, and thus have transferred the crisis onto companies, said Cai. Leaders at all levels of government see their political and career future determined by their achievements, which are mainly appraised by GDP growth.

Therefore, tax quotas are increased gradually from provincial governments down to county-level governments, before finally being footed by enterprises and business owners, he said, adding that entrepreneurs have lost confidence in the general business environment.

Within the past five months, the total amount of taxes for industrial enterprises in Wenzhou have increased by 1.9 percent, despite a 19 percent drop in profits, according to a research report by Financial and Economic Committee of the Zhejiang Provincial People's Congress in July 2012.

In China, small- and medium-sized enterprises (SMEs) suffer from six kinds of "hidden" burdens, including taxes, sundry fees, fines and corruption, according to a comment posted on People's Daily by Zhang Bin, a researcher with the Institute for Finance and Trade Economics under Chinese Academy of Social Sciences.

Economic confidence

The real situation is in sharp contrast to what officials promised. Overhead levies are not allowed, vowed Finance Minister Xie Xuren in a report to the Standing Committee of the National People's Congress on August 29, 2012.

Actions by local governments have flown in the face of preferential policies for SMEs issued by the central government, said Cai, adding that the fairest way to implement preferential policies is to reduce taxes for SMEs across the board instead of giving them occasional prizes.

The central government may be well-intentioned when introducing these policies but they can easily become a hotbed for corruption. "Enterprises will get rewards if they meet certain standards, but businessmen have to 'give' something to get the rewards," said Cai, who is highly concerned about the future business climate for SMEs.

The local government charged an overhead levy, and didn't pay back irregularly charged fees, one businessman from Northeast China told Ye.

Most businessmen dare not expose this or take action to protect their rights because all their assets are involved, according to the businessman.

His views were echoed by Li Jianguo. The area where Li's enterprise located is managed by a single officer, in charge of collecting taxes, a typical structure in China. According to experts, this model gives too much power to revenue departments.

It has damaged credibility of the tax model. Speculators take the chance to pay less tax by bribing officials while honest businessmen face difficult condition caused by huge taxation bills, said Ye.

Legal overhaul needed

Tax collectors must continue to work until they have filled their quota. Currently in China, the tax quota for a new fiscal year is based on the tax collected in the previous year, after considering various possible factors which may influence taxation. These calculations can result in a situation not mirroring the economic facts on the ground.

Tax quotas should be made flexible instead of continuously being raised, so as to allow them to be consistent with overall economic conditions and the states of various enterprises. To do otherwise violates the rules of economics, said Liu Jianwen, a professor with the School of Law at Peking University.

Moreover, quotas are usually increased after orders conveyed down the government chain of command from the central government to provincial authorities, and then to city, county-level and lower departments.

Current laws related to taxation are far from enough, as most are merely administrative regulations, which do not have the same status as laws. "Flexibility is always there when administrative regulations are practiced, which leaves much room for corruption and bargaining," said Liu.

He suggests that the practice of taxation should be guided and governed by law instead of by tax collectors, adding that the local governments should change their concept from managing enterprises to serving them. "Both sides should clearly know what their rights and obligations are," said Liu.