Bonus for small businesses

China took a meaningful step to stabilize the economy on Wednesday when it announced that, from Aug 1, value-added tax and the tax on turnover will be scrapped for small businesses whose revenues are less than 20,000 yuan ($3,200) a month.

This should greatly boost the morale of small businesses, which are one of the biggest sources of jobs in the country. In all, 6 million small businesses are expected to benefit.

The announcement was made in a statement released on Wednesday after an executive meeting of the State Council presided over by Premier Li Keqiang.

The move is especially reassuring as the flash HSBC Purchasing Managers' Index tumbled to 47.7 this month from the final reading of 48.2 in June, the third consecutive month it has been below 50, which marks the point between expansion and contraction.

In fact, the reading is at an 11-month low, indicating the Chinese economy is yet to bottom out after its year-on-year growth dropped to 7.5 percent in the second quarter.

In particular, the poor reading reflects the predicament of China's private companies, since the index is mainly based on surveys of small private enterprises.

Measures such as the tax exemption announced on Wednesday will be crucial in helping them ride out the country's economic difficulties. Tax cuts or exemption from taxes are always a constructive option for businesses when the overall economic environment sours. Considering the heavy tax burden on Chinese enterprises, it is important that the government extends tax cuts or exemption to small businesses whose sales are 20,000 yuan or less a month.

The country should devise more preferential tax policies to support the corporate sector and revitalize the national economy, as small and medium-sized businesses contribute 60 percent of China's industrial output and account for 80 percent of the jobs.

Such moves will reduce the tax revenues for governments at various levels. But they will also reduce the number of bankruptcies, save jobs and increase consumption as people's confidence in the economy improves. The benefits overweigh the revenue losses, and it is worth having a try if the economic growth further slides.