As China waves goodbye to business taxes (BT) with one hand, it is welcoming a fairer business environment with the other. As of May 1, China now follows a value-added tax (VAT) system, which is set to pep up the broader economy. Starting on Sunday, the BT-to-VAT transition, which began in 2012 in certain industries, was applied to the remaining four sectors -- construction, real estate, finance and consumer services.
Construction and real estate will be subject to 11 percent VAT, while a 6-percent levy will be imposed on finance and consumer services. VAT is a tax calculated by the difference between a commodity's price before taxes and its production cost, while BT was a levy on gross revenues.
Tangible goods have been subject to VAT for some time, but the levy on services was BT: A crude system that often results in double taxation. The BT-to-VAT transition has proven to reduce the tax burden of enterprises, most of which are small companies.
During it test phase, it had reduced the tax burden of companies by 641.2 billion yuan (99 billion U.S. dollars) by the end of 2015. These newly-encompassed sectors had a combined BT scale of 1.9 trillion yuan, accounting for some 80 percent of all BT across the board and involving over 11,000 taxpayers, according to data from the State Administration of Taxation. By 5:00 p.m. on Tuesday, 1.36 million VAT invoices had been issued to 147,000 taxpayers across the country, involving 25.86 billion yuan.
Authorities estimate that now VAT has been applied to all sectors, businesses will make savings of more than 500 billion yuan. Besides, other links in the production chain will also benefit from the overhaul. The unified VAT system will create a fairer environment for businesses as the government seeks to tap growth momentum in the relatively underdeveloped service industry.
China's service sector is increasingly picking up the slack of manufacturing as the government tries to shift to a more sustainable growth model. In the first quarter, the service sector grew 7.6 percent year on year, outpacing a 2.9-percent increase in the primary industry and 5.8 percent in the secondary industry.
It accounted for 56.9 percent of the overall economy, up 2 percentage points from a year earlier, according to data from the National Bureau of Statistics. The government is also looking to the broader reform to stimulate mass innovation and create an amicable climate for private enterprises, which play a central role in job creation.
China's economy expanded 6.7 percent year on year in the first quarter, slowing further from the previous quarter. In the face of continued economic headwinds, China has made supply-side reform an economic priority, and tax cuts to lower the cost of business are a major policy option.
To cover the tax reductions for enterprises, the government has decided to increase its deficit-to-GDP ratio to 3 percent this year from 2.3 percent last year. The government deficit for 2016 is projected to be 2.18 trillion yuan, an increase of 560 billion yuan over last year.
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