(Yicai Global) March 25 -- Chinese manufacturing companies are set to reap an additional CNY80 billion (USD12.2 billion) in savings this year after the government decided to boost tax relief on research and development expenses.

China will increase the tax deduction on manufacturers’ R&D spending to 100 percent from 75 percent retrospectively from Jan. 1. An executive meeting of the State Council, the country’s cabinet, made the decision yesterday.

The change could result in an additional tax cut of CNY80 billion in 2021 on top of the more than CNY360 billion (USD55.1 billion) last year.

The cabinet also changed the calculation method used, allowing firms to benefit from the incentive on a semiannual basis. It means businesses can deduct R&D spending in the first half of the year during the prepayment of corporate income tax in October, rather than during its settlement in the following year.

Companies reacted positively to the announcement. China Silian Instrument Group expects to save an extra CNY12 million (USD1.84 million) on its CNY330 million (USD50.5 million) R&D budget this year, according to Jiang Xichen, director of the firm’s finance department.

Jiang added that the money kept will be used to make investments in scientific and technological R&D as well as to increase outlays on projects related to chips and other cutting-edge tech, boost incentives for researchers and attract experienced and highly capable talent through headhunters.

The ‘extra deduction’ implies increasing the actual amount of expenditure by a certain percentage and using the expanded number as a deductible sum when calculating taxable income. It is also a preferential way of reducing the tax burden, lust like lowering the tax rate.

According to data from the State Taxation Administration, the number of firms nationwide benefiting from the policy rose to 339,000 in 2019 from 53,000 in 2015.

China has become the second-largest R&D spender in the world, after the United Sates, investing as much as CNY2.44 trillion (USD373.4 billion) last year, up from CNY1.42 trillion in 2015.

Editors: Zhang Yushuo, Peter Thomas