The country's new unified corporate income tax for foreign and domestic enterprises has been hailed for its efforts to create fair competition between businesses, but its likely impact on economic growth is also worth noting.

China passed the law, which leveled the tax rate to 25 percent, on Friday.

"It is a basic rule-setting move that will create a level playing field for all enterprises, a cornerstone principle of market economics," Han Qi, a researcher at the University of International Business and Economics, told China Daily.

However, the effects of the law are not confined to promoting fair competition. The legislation marks a shift in the country's economic incentive strategy away from one based on taxation to one based on individual industries, Wang Xiaoguang, a Beijing-based senior economist, told China Daily.

For example, high-tech enterprises that are in line with State industrial policy are eligible for preferential tax treatment under the new law.

"This will have a positive impact on domestic technological innovation," said Wang.

Domestic firms may take advantage of their lower tax burden to spend more on developing new and competitive technologies, he added.

The National Development and Reform Commission will draft industry lists to implement the innovation article, he said.

Technological innovation has been in the spotlight in recent years as the country has focused on following a more sustainable path to economic development instead of relying heavily on investment.

And for foreign enterprises, the new law does not just mean having to pay slightly more taxes.

It is expected to further encourage foreign investment by high-tech companies, though China has been emphasizing such investment ever since it opened the doors to foreign funds, said Han.

Many foreign investors export their products, which will help China improve its export structure by increasing the value added of the goods it ships.

"Although it will be a long-term process, it will happen," said Wang.

The new law will also reduce the tax burden on domestic companies, which should enable them to concentrate more on domestic marketing.

"Many domestic enterprises have found it hard to sell domestically given the weak domestic demand," said Wang. "As a result, they choose to sell overseas."

With stronger balance sheets, domestic firms should have more room to maneuver within the domestic market, said Wang.

This will somewhat ease international pressure on China, which has seen its foreign trade surplus swell in recent years - the trade surplus hit US$177.5 billion last year, up 74 percent year-on-year.

The new tax law also stipulates continuing tax breaks for the vast, but economically backward western regions, which should bring more balance to the country's economic development.

"This is good news for the western regions, but also for China as a whole in the long term," said Wang.

The country's eastern coast is home to about 90 percent of the country's foreign-invested enterprises and the source of most of its exports.

As the new law takes effect, the eastern regions may see some of their foreign investment move west, noted Wang.

This should bring more capital to the western regions and help speed up their industrialization, he added.

(China Daily March 20, 2007)