China will cut the value-added tax rates as part of a tax reduction package amounting to 400 billion yuan ($63 billion) this year to drive high-quality development, a State Council executive meeting chaired by Premier Li Keqiang decided on March 28.
The tax rate for manufacturing will be lowered from 17 to 16 percent, and the rate for transportation, construction, basic telecommunication services and farm produce from 11 to 10 percent, according to a decision at the meeting.
Premier Li said that VAT reform is a major step in China’s tax regime reform.
“VAT reform has helped reduce the overall corporate tax burden, and improve the tax regime. The reform has proved to be conducive to the transformation and upgrading of the economy, unifying the tax structure and making taxation fairer,” he said.
“This round of tax cuts will apply to all manufacturing companies. All businesses registered in China, be they joint ventures or wholly foreign owned companies, will be treated equally,” the Premier said.
VAT reform was first piloted in Shanghai before it was rolled out nationwide in May 2016. It has delivered total tax cuts of 2.1 trillion yuan over the past five years.
The services sector has expanded significantly as a result. Its added value rose by 8 percent and accounted for 51.6 percent of GDP in 2017, according to the National Bureau of Statistics. The reform has also boosted entrepreneurship, innovation and the development of new industries and new forms of business. Micro and small firms have been the biggest beneficiaries in this process.
The Premier said in his Government Work Report earlier this month that efforts will be made to further lighten the tax burden on businesses. The government will reform and improve VAT, consolidate the three tax brackets into two and adjust tax rates, prioritize lowering rates in manufacturing and transportation, and raise the threshold for annual sales volume for small-scale taxpayers.
As part of the tax cut package, eligible enterprises in advanced manufacturing, modern services and electric utility will receive a lump-sum refund for their input VAT payments yet to be deducted.
The meeting also decided to unify the standard for small-scale taxpayers, raising the threshold of taxable annual sales volume for industrial and commercial enterprises from 500,000 yuan and 800,000 yuan to 5 million yuan. Enterprises registered as general taxpayers will be allowed to switch their status to small-scale taxpayers within a given time.
All the tax cuts will take effect starting on May 1.
The Premier said that reducing the three tax rate brackets to two in one go is a hugely challenging job, as reforms are normally pursued in small increments. Yet this goal is not beyond reach.
He stressed that no industry should see its tax burden increase in the course of VAT reform; this will be the guiding principle of all related reform measures.