The State Council on Dec 1 issued a decree signed by Premier Li Keqiang, publicizing the content of a circular amending the previous interim VAT regulations and abolishing the business tax, which went into effect immediately.
The move confirmed and consolidated the achievements of the VAT pilot reform. It means that the business tax, which has been in place for over 60 years, has stepped down from the stage of history while the VAT reform has entered a new stage.
To further deepen tax reform and address the double taxation caused by the coexistence of VAT and business tax, China first implemented the VAT pilot reform in transportation and some modern service industries in Shanghai, starting on Jan 1, 2012. Then the pilot reform was expanded to more areas and industries and was rolled out across the country on May 1, 2016.
Replacing the business tax with VAT and ending the system that was in effect since 1994 is a major initiative to promote supply-side structural reform as well as a significant fiscal, tax reform and tax cut policy.
The latest statistics show that VAT reform has saved enterprises 1.7 trillion yuan ($257 billion) in taxes so far. Especially from its expansion on May 1, 2016, to June 2017, over 850 billion yuan was directly cut for various industries.
“Following the expansion of the pilot reform from May 1, 2016, the provisional regulations on business tax were actually abolished. After steady progress and decisive achievements were made in the reform, the State Council decided to confirm and consolidate the achievements according to law and stabilize the expectations of all parties, which came at the right moment,” said Liu Jianwen, professor at Peking University Law School.
The VAT reform has unleashed dividends in accelerating the development of service industries and the transformation and upgrading of manufacturing, providing more space for small and micro enterprises and driving entrepreneurship and innovation.
According to the principle of law-based taxation, all current tax-related provisional regulations will be legislated. Hence, the legislation on VAT has received much attention.
“The future VAT, which would be more enforceable, will be a significant achievement of the tax reform and the implementation of the tax principle,” Liu said.