China will replace business tax in all industries with value-added tax (VAT) from May 1 this year, a concrete step in deepening fiscal and taxation reform to arrest the slowdown of the world’s second largest economy.
“The progress in the VAT reform last year was slower than having planned and efforts would be made to meet the May 1 deadline this year,” said Lou Jiwei, minister of Finance on the sidelines of the legislature National People’s Congress (NPC).
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Starting from May 1, the replacement of business tax with VAT will be extended to construction, real estate, finance and consumer services, to ensure that the tax burdens on all industries are reduced, Premier Li Keqiang had said in a government work report to the national legislature.
Business tax refers to a levy on the gross revenue of a business while VAT refers to a tax levied on the difference between a commodity’s price before taxes and its cost of production.
The uniform VAT tax system however raised concerns among provinces which fear that centre may grab bulk of their tax earning.
A pilot scheme on business tax-to-VAT was tested in 2012.
From 2012 to the first half of 2015, the measure has resulted in tax savings of over 484.8 billion yuan (USD 75 billion) accounting for 0.2 per cent of GDP in the period, according to a report of China International Capital Corp. Ltd., a joint venture investment bank.
China’s transition to the VAT system is welcomed by international auditing agencies like KPMG saying that it will be a positive development for the Chinese economy.
“This is a significant and positive development as China will have one of the most progressive VAT systems in the world,” Lachlan Wolfers, KPMG China head of indirect taxes said.
China will be among the first countries in the world to apply VAT broadly to the financial services sector. That means that interest on loans made to businesses and consumers will be subject to VAT.
The European Union has spent years studying whether VAT could be applied to financial services, and have not been able to implement it.
It would not be a surprise to see other countries follow suit if the Chinese do it successfully, the KPMG said.