Premier Li Keqiang emphasized the driving force of the reform that will replace business tax with value-added tax next month.
The reform is being rolled out nationally after a successful four-year pilot run in Shanghai and other regions.
Business tax will be replaced with value-added tax (VAT) from May 1 in all sectors, including the remaining four sectors of property, construction, finance and consumer services that involve more than 10 million taxpayers, according to the Premier.
Amid rising uncertainties in the global economy, the country has to withstand the downward pressure of domestic economic growth by adopting proactive fiscal policies, Premier Li stressed.
In his annual Government Work Report last month, the deficit ratio was set at a new record high of 3 percent for this year to make room for tax deduction, for which the VAT reform is the main channel, Premier Li said. The deficit ratio last year was 2.3 percent, according to the 2015 Government Work Report.
Therefore, the reform is a key part of the work of the central government this year, showing the mounting effectiveness of proactive fiscal policies, Premier Li said.
The reform will boost vitality among enterprises and add impetus to the economy while many industries and enterprises are facing difficult times, he said. The VAT not only decreases tax burdens for enterprises, but is also essential in restructuring the economy.
As of the end of last year, tax deductions reached 641 billion yuan ($99 billion) as a result of the four-year pilot reform, and this played a key role in fueling economic growth amid downward pressure, Premier Li said.
Under the reform, tax deductions this year alone are expected to exceed 500 billion yuan, the highest number since 2013, the Premier said. The number of newly registered enterprises had unexpectedly increased dramatically in the past two years, meaning more enterprises will benefit from the reform, the Premier said.
The new VAT avoids double taxation by taxing only the difference between a commodity’s price, before taxes, and its cost of production and can help create a market environment of fair competition, said Premier Li.
The reform is meant to decrease government revenue to boost corporate profits and market vitality, he said.
“Some people had a misunderstanding about the reform as VAT rates are 6 percent or 11 percent, while the business tax rate was only 5 percent. It created an illusion that more taxes would be levied. So we have made great efforts to explain that the VAT is actually 2 to 3 percent less than business tax,” Premier Li said.