Can consumers expect high of value-added tax? (2)

The two new lower tax rates are an important step toward the enhancement of the tax mechanism, and will resolve the issue of duplicate taxes and lower the tax burden, according to Liu Shangxi, vice president of a research institute under the Ministry of Finance.

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"The tax reform will benefit most companies which are facing increasing operation costs in the services sector, such as transportation firms," said Wang Han, an analyst at Industrial Securities in Shanghai.

Wang added the move is also part of a selective easing in China's economic policy to help smaller firms, which are suffering from a credit crunch amid tight monetary conditions.

Certainly, value-added tax will lessen the tax burden of producers, and for them the tax abatement would be remarkable.

But that does not mean a direct decline in goods' prices consumers buy.

It has a limited effect on the price of end products because price changes depend largely on the supply-demand relations, according to Liu Shangxi.

If a product was oversupplied, its price may drop albeit a tax increase, but if the supply fell far short of demand, the price would skyrocket regardless of a tax increase.

Therefore, consumers would better not expect too much from this value-added tax reform.

In addition, replacing the business tax with VAT will reduce local governments' fiscal revenue substantially.

VAT is one of those taxes whose proceeds are split between the central and local governments. Currently VAT is split 3:1 between central government and local governments, unlike the business tax which all goes to local governments.

So it is too early to predict what this reform will bring us.