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China’s VAT reform: A look back at a year of changes

It’s been a year since China dropped its business tax in favor of a value added tax in the real estate, construction, finance and service sectors. It was a move that essentially completed a switch to a new tax system for all businesses in China. So what has changed in this past year?

Small businesses have been pleased with the new tax system, now only paying 3 percent in tax on their profits. Larger companies, however, have felt a greater burden. They now pay between 6 percent and 17 percent in tax on profits, depending on the business sector they operate in.

China’s VAT system allows companies to receive tax credits on input materials and services once a sales transaction is taxed. Companies then use the credits to reduce the taxes which they have to pay on the sale.

Experts say that considering the size of China’s economy and the complexity of a VAT system, China’s VAT reform has been a success. Still, business operators must be careful to strictly follow VAT rules. Failure to do this results in higher tax payments.

In an effort to cut corporate taxes and simplify the VAT system, Premier Li Keqiang has announced that the four-tiered VAT system will be reduced to three starting on July 1, along with the implementation of more tax cuts. The government says the new system saved companies 570 billion yuan in 2016 in terms of taxes, and that the additional reforms will produce another 350 billion yuan in tax savings for companies this year.