VAT is levied on the difference between a commodity's retail price and its cost. "Small businesses... are playing an important role in promoting economic development and market prosperity as well as expanding employment," the statement said in explaining the move.
It was among a series of measures to support the economy unveiled by Chinese Premier Li Keqiang at a cabinet meeting on Wednesday. The tax exemptions will benefit more than six million small companies, the statement added. China's economy expanded 7.5 percent year-on-year in the April-June period, slowing from 7.7 percent in the previous three months, raising worries the world's second largest economy could be headed for a sharp downturn.
Among other steps, the government will set up a fund for railway development, offer tax rebates and keep the yuan's exchange rate at a "reasonable" level to boost international trade, it said. Exporters complain a stronger yuan is hurting their overseas sales by making their products more expensive.
Lu Ting, an economist with Bank of America Merrill Lynch, called the new policies a "small stimulus". "Premier Li's team has been surely working around the clock to arrest the slowdown," Lu wrote in a research note on Thursday. "These three measures will have limited direct impact on boosting aggregate demand in the short term, but they can surely help boost confidence," he said.