China rolls out VAT system aimed at cutting business costs

  • Reuters, Beijing
  • Updated: May 01, 2016 19:54 IST
New tax reforms in China will be effective from May 1. (AFP file photo)

China has rolled out a value-added tax (VAT) system across all industries that previously had a business tax, in the most ambitious overhaul of its tax regime in three decades.

The world’s second-largest economy is stumbling through its slowest growth in a quarter century but is continuing with tough reforms in its transition to a services-oriented economy from one powered by manufacturing.

The government first began experimenting with a VAT in 1979 and started applying the tax to specific sectors in 2012. The final four sectors to adopt a VAT on Sunday are construction, property, finance and life services - which includes food and beverage, healthcare and tourism industries.

Premier Li Keqiang had said the reforms would be adopted by May 1 in his work report at the annual parliament in March.

A business tax directly taxes businesses, whereas a VAT - sometimes known as a goods and services tax - is borne by the end consumer, reducing the burden on companies which are facing rising costs and a slowing economy.

Consumers will pay varying levels of VAT, depending on the industry, China’s vice-minister Shi Yaobin told a news conference in April. Most of the services sector was previously subject to a business tax rate of either 3 or 5%.

The government hopes the reforms will cut firms’ tax burdens by more than 500 billion yuan ($77.23 billion) this year, part of a broader push for “supply-side reforms” aimed at cutting red tape and scaling back the role of government in business to allow market forces greater room to flourish.

China’s 2016 government deficit is set to rise to 3%, up from 2.3% in 2015, primarily due to the discrepancies created by tax cuts for business, Premier Li had said.

Local governments are set to be worse off under the new tax scheme, as they were previously highly reliant on revenue from the business tax.

Revenues from the VAT will be shared between China’s central and local governments, with each receiving 50%, the Ministry of Finance said on its website on Saturday.

China’s services sector accounts for more than 50% of the economy.

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