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Right move in VAT direction

By Lachlan Wolfers  (China Daily)

08:04, August 22, 2012

China has introduced new value added tax reforms across 10 cities and provinces, including Beijing and Guangdong province. The reforms, to be phased over the next six months, come on the heels of a successful VAT pilot program started in Shanghai in January.

The business community has welcomed the reforms, especially because of the current global economic uncertainty. The reforms will align China's indirect tax system with the world's best practices, reflecting the government's commitment to promote the growth of the services sector as part of the 12th Five Year plan (2011-15).

For many years China has had a dual system of indirect taxes - a VAT applicable to goods and a business tax applicable to the services industry.

A VAT is essentially a tax collected by businesses. But ultimately, it is embedded in the final price charged to an end consumer. While it is collected by each business in a supply chain, credits are generally granted for purchases made by each business in the supply chain, so that only the final price bears VAT. This tax is now charged in more than 150 countries.

In contrast, business tax is a type of turnover tax - it is payable in each stage of a supply chain. It means that if one business provides a service to another, then the business tax is payable again, and again, until the service is eventually provided to the end consumer. Economists generally describe these types of taxes as "cascading" taxes, and they are inefficient for modern economies.

In China, VAT is going to replace business tax. To manage the transition most effectively, these reforms are initially being implemented through a pilot program that started in Shanghai on Jan 1, and are applicable to the transportation and modern services industries. The Shanghai pilot program has been very successful, with about 90 percent of businesses benefiting from a reduced tax burden, according to information from the Shanghai Finance and Tax Bureau in June.

The estimated VAT tax revenue since it was introduced in Shanghai is 8.45 billion yuan ($1.33 billion) compared with the business tax revenue for the equivalent period of 9.364 billion yuan ($1.47 billion), which is a reduced tax burden of 10 percent.

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