Editor's Note:

Over the past year, China's top leadership has been trying to move the economy toward a more sustainable path, with a slew of reforms announced at the Third Plenary Session of the 18th Communist Party of China (CPC) Central Committee in November 2013. The recently concluded Fourth Plenary Session of the 18th CPC Central Committee proposed reinforcing legislation in key areas and speeding up improvements to the legal system to reflect equal rights, opportunities and fair rules, all heralding a new chapter in the development of the Chinese legal system. Amid short-term difficulties caused by structural adjustments and the "new norm" of slower economic growth, China is set to harvest the fruits from local fiscal and taxation reform and mixed-ownership reform of State-owned enterprises (SOEs), as well as financial and stock reforms. This is the second of three issues dedicated to examining the impact of the reforms in transforming China. The following focuses on the fiscal and taxation reforms unveiled in the past year.

Fiscal reform has been top of the agenda for China's ambitious reform road map, released after the Communist Party of China's top meeting in November 2013. Some targets of the fiscal reform have already been achieved.

China vowed last year to build a complete and transparent fiscal system to ensure fairness of income distribution through taxation.

The key aspects included establishing a transparent budget management mechanism, fine-tuning the tax structure and rectifying cases of tax malpractice nationwide.

"Among the major areas of progress over the past year, the most important was the amendment of the Budget Law," Zhu Weiqun, a professor at Shanghai University of Finance and Economics, told the Global Times on Tuesday.

China's legislators passed the amendment to the Budget Law on August 31, signaling a new effort to straighten out the national budget and control the country's spiraling local government debt.

Local government debt surged by 67 percent from the end of 2010 to 17.9 trillion yuan ($3 trillion) in June 2013, and about 40 percent of the debt came from off-budget funding attained through local government-backed financing vehicles (LGFVs), according to the National Audit Office.

The amended law set a legal framework allowing more local authorities to raise funds by selling bonds directly for projects of public interest, after a pilot program in May that permitted 10 local governments including Beijing and Shanghai to sell municipal bonds and repay their own debt.

Under the amended law, local authorities can now sell debt within quotas approved by the State Council. Bond sales to finance daily expenditure and all forms of credit guarantees to individuals or entities are banned.

"Local governments are liable to repay their debts - the central government will not [necessarily] bail them out," said a new rule released on October 2 by the State Council as part of the amended law.

Furthermore, local government debt will be used to judge the performance of local officials, and they will be held accountable for debt defaults.

Before the amendment, local authorities were prohibited from selling bonds directly, forcing them to set up thousands of LGFVs to raise money for construction of roads, bridges, railways and airports, and leaving an increasing pile of murky local debt for the central government to deal with.

The lending spree in 2009-10 following the 4 trillion yuan stimulus package that had been launched to prop up the economy also contributed to the rise in local debt, partly through shadow banking activities that were off the radar for regulators.

However, China will achieve its major fiscal reform targets by 2016, and the building of a modern fiscal system will be completed by 2020, the Xinhua News Agency reported in July citing Lou Jiwei, the finance minister.

A budget management mechanism is the basis for the fiscal reform, and the next step is to set up a unified and fair system by reforming six taxes - value-added tax (VAT), consumption tax, resources tax, environmental tax, property tax and individual income tax - Lou was quoted as saying.

VAT reform will gradually be expanded to the construction, property and financial sectors, and it will completely replace turnover tax by 2015, Lou said.

Following regional pilot programs since early in 2012, VAT reform expanded to railway transportation and postal services in January, and to the telecommunications sector in June.

VAT reform has cut firms' tax burden by as much as 328 billion yuan since 2012, the State Administration of Taxation said on October 31.

For 2015, the central government may share revenue from consumption tax with local governments, Ye Qing, a public finance professor at Hubei-based Zhongnan University of Economics and Law, told the Global Times on Tuesday.

Currently, consumption tax on luxury products and high net worth individuals is only received by the central government.

By sharing the consumption tax, local governments will get additional tax income to make up for losses resulting from VAT reform, Ye said.