China’s latest tax overhaul aims to cut business costs

Beijing, May 1

China has rolled out a value added tax (VAT) system across all industries that previously had a business tax, in the most ambitious overhaul of its tax regime in three decades.

The world’s second-largest economy is stumbling through its slowest growth in a quarter century but is continuing with tough reforms in its transition to a services-oriented economy from one powered by manufacturing.

The government first began experimenting with a VAT in 1979 and started applying the tax to specific sectors in 2012. The final four sectors to adopt a VAT today are construction, property, finance and life services — which includes food and beverage, healthcare and tourism industries.

Premier Li Keqiang had said the reforms would be adopted by May 1 in his work report at the annual parliament in March.

A business tax directly taxes businesses, whereas a VAT — sometimes known as a goods and services tax — is borne by the end consumer, reducing the burden on companies which are facing rising costs and a slowing economy.

Consumers will pay varying levels of VAT, depending on the industry, China’s Vice Minister Shi Yaobin told a news conference in April. Most of the services sector was previously subject to a business tax rate of either three or five per cent.

The government hopes the reforms will cut firms’ tax burdens by more than 500 billion yuan ($77.23 billion) this year, part of a broader push for ‘supply-side reforms’ aimed at cutting red tape and scaling back the role of government in business to allow market forces greater room to flourish.

China’s 2016 government deficit is to rise to three per cent, up from 2.3 per cent in 2015, primarily due to discrepancies created by tax cuts for business, Premier Li had said.