China's tax system has been blamed for creating a widening income gap by allowing loopholes for big businesses to evade paying taxation, while restricting the development of small businesses through the imposition of heavy taxes.

Under the present system, many Chinese became rich by becoming adept at evading taxes. In contrast, small- and medium-sized enterprises are forced to develop slowly, as they struggle with the burden of being heavily taxed, Economic Information Daily reported on Monday following an exclusive investigation that covered Liaoning, Anhui, and Hunan provinces.

A recently exposed case of tax evasion involved a well-known company in Central China's Hunan province. According to company records, a quarter of its sales revenue is around the 200 million yuan ($29.29 million) mark, but it only declared 19 million yuan to the local tax bureau, the report said.

Moreover, the company kept a large amount of cash in reserve for its daily transactions, in order to avoid attracting the attention of the local tax bureau.

The company's use of subterfuge "caused a great loss of tax revenue", an unnamed local taxation official said in the report." Without the inspection, the company owner would have pocketed all the money.

"It is quite common to see an enterprise with more than 10 million yuan in annual returns pay only a little in taxes. Many people have become rich by evading taxes," he added.

Luo Lichong, deputy chief of a local national tax bureau in Leiyang city, Hunan province, said there are many rich coal bosses in the city. However, it is hard to supervise their businesses to ensure that they pay tax according to the regulations, because it is possible to cover up their real incomes in ingenious ways, such as cooking the books to produce false accounts or by falsifying their reported sales revenue.

"Someone divided income into several parts. For each part with less than 2,000 yuan, which was the starting point, people with a monthly income of 10,000 yuan could easily escape from paying tax," said Zhu Jiangtian, deputy chief from the local taxation bureau in Liaoning province.

In contrast, heavy taxation blocks the development of small- and medium-sized enterprises.

The current starting point at which small-scale taxpayers are required to pay value added tax (VAT) has increased from 2,000 to 5,000 yuan. However, it is still too harsh for them, according to Zhou Fangping, office director of the national tax bureau in Hunan province.

"Whether or not their businesses make profits, small-scale taxpayers are forced to pay VAT when sales revenue reaches 5,000 yuan. It imposes greater burdens on small businesses," he said.

Furthermore, business taxes in the service industries, such as catering and retailing, are simply imposed by counting the number of dining tables or employees, which is totally unfair, he added.

Zhou Tianyong, a professor with the Party School of the Central Committee of the Communist Party of China, said the current tax system not only hampers the development of small businesses, but is also responsible for enlarging the gap between the rich and the poor.