Starting May 1, China replaced the business tax with a value-added tax (VAT) across all industries after extending the policy to cover the construction, real estate, finance and consumer services sectors.
As part of supply-side structural reforms, value-added tax will ensure that tax burdens for all industries will be reduced, which is key to advancing taxation reform in China.
Before the implementation of VAT, the country levied VAT on goods, while levying a business tax on services. In addition, it levied VAT on the manufacturing sector, while levying a business tax on the service sector. The varied tax-collecting method sometimes resulted in double taxation.
The expansion of the VAT scheme has unified the tax levied on second and tertiary industries. Liu Shangxi, director of the China Fiscal Science Institute, said that it is conducive to promoting the integration of the manufacturing and modern service industry and providing new momentum for the transformation and upgrading of industrial structure.
In addition, the expansion of the VAT scheme has also included VAT levied from enterprises’ new real estate to the scope of tax deduction, which will lead to reducing the tax burden and creating a market environment for fair competition.
Li Wanfu, director of the Taxation Science Research Institute of the State Administration of Taxation, said that the overall implementation of VAT is expected to ease tax burdens by more than 500 billion yuan ($76.9 billion) a year, in which small and micro-sized enterprises will enjoy greater tax reductions.
While Wang Jianfan, director of the tax policy department at the Ministry of Finance, noted that even though the value-added tax will ensure tax burdens on all industries will be cut, it doesn’t indicate that taxes levied on all enterprises will be reduced in practice. “For any single enterprise, the increase or reduction of tax is closely connected with its operation style and purchasing cycle,” Wang added.
Liu Shangxi said that enterprises should make efforts to advance reform, adjusting their operation strategy and improving financial management in order to benefit from the taxation reform. For government departments, related policies should be fully implemented to ensure the reduction of taxes in all industries.