China expands VAT reform

The State Council, or China's cabinet, on Wednesday decided to expand its value-added tax (VAT) reform to nationwide and more industries to further reduce tax burdens on businesses.

From August 1, the reform, replacing turnover tax with a value-added duty in transport and some service sectors, will spread to the whole country from the current 12 provinces and municipalities, according to a statement issued by the State Council after an executive meeting presided over by Premier Li Keqiang.

Film, radio and television industries will be included in the pilot reform.

It is estimated that the widening reform will reduce tax burdens by about 120 billion yuan (19.04 billion U.S. dollars) this year, the statement said.

The government will extend the reform at a due time to railway transport, postal services and telecommunications industries. It will strive to complete the reform by the end of 2015.

Turnover tax refers to a levy on the gross revenue of a business. VAT refers to a tax levied on the difference between a commodity's price before taxes and its cost of production.

The reform is intended to further boost business vitality, help enterprises find new growth, increase employment and residents' income to promote sustainable and healthy development, according to the statement.

The decision to expand the reform nationwide comes much quicker than the market expected. Liu Shangxi, a researcher with the Ministry of Finance (MOF), said it signals the government taking a more proactive and pragmatic stance.

When meeting Chinese and foreign press for the first time as Chinese premier last month, Li Keqiang pledged to deepen comprehensive reforms in the world's second-largest economy as the country seeks new momentum for development other than its large workforce.

Structural tax cuts are among means that it is hoped can help boost the slowing economy and unleash more potential from enterprises.

China introduced the reform in Shanghai last year to avoid double taxation. It was later expanded to another 11 regions, including Beijing, Tianjin and Shenzhen.

By February 1, the program had saved taxes of over 40 billion yuan for more than 1 million taxpayers, showed data from MOF.

The previous efforts have generated prominent effects in the manufacturing and service industries. As the global economy is still cloudy, this move certainly helps stabilize the Chinese economy, said Gao Peiyong, a researcher with the Chinese Academy of Social Sciences.

The reform should also accelerate China's economic restructuring by optimizing industrial structure and improving quality of growth, said Liu Shangxi.

For Internet companies, the money saved from paying taxes could be used to increase spending on research and development, according to Li Jian, tax manager with Baidu.

Currently, turnover tax must be paid by nine industries in China -- transport, construction, financial and insurance, postal and telecommunications, cultural and sports, entertainment, service, transfer of intangible assets and sales of real estate.

After the VAT reform is fully completed, turnover tax will be consigned to history, Liu Shangxi said.

Since turnover tax is a major source of tax revenue for local governments, Gao Peiyong said the reform could readjust the revenue distribution between the central and local governments.

The impact could be as big as that of the tax reform in 1994, when central government withdrew most of the tax revenue ownership from the local authorities, he noted.

The cabinet also asked government agencies at all levels to tighten their belts and spend prudently to make room for tax reform.