China widens VAT to more regions in tax reduction

The Chinese government said Wednesday that it will expand the pilot reform of replacing turnover tax with value-added tax (VAT) to 10 more provinces and cities from August 1 this year as part of the country's efforts in structural tax reduction.

The VAT will be applied to the transport sector and part of service industries in Beijing and Tianjin municipalities, Jiangsu, Zhejiang, Anhui, Fujian, Hubei and Guangdong provinces, as well as the cities of Xiamen and Shenzhen, according to a decision handed down by an executive meeting of the State Council, China's Cabinet.

The State Council promised to expand the pilot reform to more cities and sectors next year.

China's VAT pilot is part of a broader tax reform that began in 2009 with the aim of lowering the overall tax burden and boosting certain sectors.

Shanghai was the first city to try the VAT reform, where the business tax has been substituted by VAT with an 11-percent VAT rate on the transport sector and a 6-percent rate on the modern service industry, including research and development, culture, logistics and consultation, and technological services.

An indirect tax typically on an ad valorem basis, turnover tax applies to a production process of a business with the tax rates varying from 3 percent to 15 percent according to different sectors, while a VAT is taxed on the difference between a commodity's price before taxes and its cost of production.

Under China's current tax regime, VAT is collected by the state taxation authorities, with 75 percent turned in to the central government and the rest to local governments. Revenues from business tax belong to local governments and account for more than one-third of local government incomes.

Based on calculations from the State Administration of Tax (SAT), the replacement of the turnover tax could lift China's gross domestic product growth by 0.5 percentage point, Xiao Jie, director of the SAT, said in March.