VAT to ease firms’ bur­den, boost growth

China Daily (Canada) - - LIFE -

China will re­place busi­ness tax with value-added tax, or VAT, fromMay 1 in what is seen as a ma­jor tax­a­tion re­form. The move will re­duce the gov­ern­ment’s tax rev­enue by more than 500 bil­lion yuan ($76.99 bil­lion), but si­mul­ta­ne­ously it will ease the tax bur­den of en­ter­prises. In this sense, the tax re­form shows the gov­ern­ment is se­ri­ous about help­ing en­ter­prises tide over the tough eco­nomic sit­u­a­tion and fur­ther sta­bi­lize the macroe­con­omy.

The re­place­ment of busi­ness tax with VAT will elim­i­nate mul­ti­ple taxes on the same prod­ucts and help the mar­ket play a more de­ci­sive role in re­source dis­tri­bu­tion. The pi­lot pro­gram of re­plac­ing busi­ness tax with VAT will be ex­tended to the re­main­ing four sec­tors— prop­erty, construction, fi­nance and con­sumer ser­vices— to cover all goods and ser­vices. VAT will be levied with dif­fer­ent tax rates to en­sure the im­ple­men­ta­tion of the tax re­form and ease the tax bur­den on var­i­ous in­dus­tries.

Also, real es­tate in­put tax de­duc­tion is an important part of the over­all pi­lot re­form.

Pro­pel­ling the all-round pi­lot re­form is not an easy task, how­ever, be­cause it in­volves so many in­dus­tries. To push for­ward the re­form, there­fore, the na­tional tax au­thor­ity and lo­cal tax bu­reaus have to deepen their co­op­er­a­tion.

Busi­ness tax is mainly lo­cal tax in na­ture. For tax col­lec­tion and man­age­ment, how­ever, lo­cal tax bu­reaus have to em­ploy huge hu­man, phys­i­cal and fi­nan­cial re­sources. So af­ter the pi­lot re­form of re­plac­ing busi­ness tax with VAT, the na­tional tax au­thor­ity’s work­load will greatly in­crease, be­cause this round of trial re­form will in­volve more than 11 mil­lion en­ter­prises and over 2 tril­lion yuan in tax rev­enue.

VAT col­lec­tion and man­age­ment, how­ever, can be­come eas­ier if lo­cal tax of­fi­cials, who have abun­dant ex­pe­ri­ences in the field, closely co­op­er­ate with the na­tional tax au­thor­ity. Af­ter all, one of the main rea­sons for the tax re­form is to in­te­grate na­tional and lo­cal taxes in or­der to im­prove tax ser­vices and re­duce tax­pay­ers’ bur­den.

Dur­ing the ini­tial stages of the pi­lot re­form, the newly col­lected VAT rev­enue was al­lo­cated to the lo­cal au­thor­i­ties, which won the sup­port of lo­cal gov­ern­ments and helped pro­mote the pro­gram. But with the all-round im­ple­men­ta­tion of tax re­form, this ar­range­ment has to be changed, be­cause it is equal to di­vid­ing the VAT rev­enue be­tween the cen­tral and lo­cal au­thor­i­ties on the ba­sis of clas­si­fi­ca­tion of in­dus­tries.

Ow­ing to tech­no­log­i­cal progress and the devel­op­ment of emerg­ing in­dus­tries, the dis­tinc­tions among var­i­ous in­dus­tries are be­com­ing more and more vague, which means there should be a more ap­pro­pri­ate way of di­vid­ing the VAT rev­enue be­tween the cen­tral and lo­cal gov­ern­ments.

In the short term, it would be more prag­matic to in­crease the pro­por­tion of lo­cal au­thor­i­ties’ share in theVATrev­enue if there is­no­fun­da­men­tal re­form in fis­cal re­la­tions be­tween­the cen­tra­land­lo­cal gov­ern­ments. If the lo­cal gov­ern­ment’s share of theVATrev­enue could in­crease to 50 per­cent from the cur­rent 25 per­cent, it­may solve the prob­lem of in­suf­fi­cient lo­cal fis­cal rev­enue.

The all-round pi­lot tax re­form faces chal­lenges, but it pro­vides a very goodoppor­tu­nity to the au­thor­i­ties to cor­rect the er­rors in the tax sys­tem by, for ex­am­ple, es­tab­lish­ing a nor­ma­tiveVATsys­tem through leg­is­la­tion as soon as pos­si­ble.

The pos­si­ble leg­is­la­tion should con­sider merg­ing (and grad­u­ally re­duc­ing) the dif­fer­ent tax rates into theVATto sim­plify the new­tax struc­ture. Inad­di­tion, the range ofVATin­put tax de­duc­tion should be fur­ther reg­u­lated, be­cause neu­tralVAT re­quires only levy­ing tax­ont­headded­value parts.

Be­sides, the pos­si­ble VAT leg­is­la­tion should prop­erly deal with tax ex­emp­tions for spe­cial in­dus­tries, in­clud­ing fi­nance and agri­cul­ture, in or­der to es­tab­lish a mod­ern VAT sys­tem.

The author is a re­searcher at the Na­tional Acad­emy of Eco­nomic Strat­egy, Chi­nese Acad­emy of So­cial Sciences.

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