China to woo manufacturing firms to invest in innovation with higher tax break for R&D

China will raise the extra tax deduction to 100 per cent for manufacturing companies.
China will raise the extra tax deduction to 100 per cent for manufacturing companies.PHOTO: REUTERS

SINGAPORE - Companies are the most important driving force behind innovation, and China is taking steps to encourage firms to invest in research and development, Chinese Premier Li Keqiang said on Thursday (March 11).

"We must rely on market forces in driving scientific and technological innovations," he told reporters in Beijing, at the conclusion of the annual National People's Congress.

That is why the world's factory is offering a higher tax break for manufacturing companies when they invest in R&D, he added.

China will raise the extra tax deduction to 100 per cent for manufacturing companies while continuing to keep the rate at 75 per cent for other companies' research and development costs.

"This is a market-oriented and inclusive tax break measure aiming to keep companies driven," he added.

Mr Li's comments come as tensions between China and the United States have extended to the technology space, affecting companies like tech giant Huawei and the semiconductor industry.

Basic research is an area that China needs to do better in, Mr Li pointed out, adding that the government has committed to increase spending in this area, which typically takes a longer time to yield results.

"In terms of basic research, we are still quite underperforming," he said.

He noted that China's spending on R&D as a percentage of gross domestic product "is still of a modest amount, especially in terms of basic research".

"It is only 6 per cent," Mr Li said. The figure for developed countries ranged between 15 and 25 per cent, he pointed out.

China's spending on R&D grew 10.3 per cent to 2.44 trillion Chinese yuan (S$504 billion), accounting for for 2.4 per cent of its GDP last year, according to official statistics.

In its latest work report that lays out China's priorities, the government will increase its annual R&D spending by more than 7 per cent every year over the next five years, and its expenditure on basic research by 10.6 per cent this year.

Semiconductors, genetic research and biotechnology and deep space, deep sea and polar exploration are among areas it wants to boost.