China replaced all business tax with a value-added tax (VAT) after extending the policy to cover four new sectors of construction, real estate, finance and consumer services, as part of reform agenda to halt economic slowdown in the world’s second biggest economy.
The inclusion of the four remaining sectors will bring almost all goods and services under the VAT cover and is expected to save Chinese businesses billions of dollars.
VAT refers to a tax levied on the difference between a commodity’s price before taxes and its production cost.
Revenue tax refers to a levy on a business’s gross revenues.
The expansion of the VAT scheme is expected to ease tax burdens by more than 500 billion yuan ($76.9 billion) this year.
China’s service sector is increasingly picking up the slack of manufacturing as it shifts towards a more sustainable growth driven chiefly by consumer demand.
Expanding VAT to more service sectors is also part of the supply-side structural reforms authorities have been promising since last year to address the structural imbalances in the Chinese economy.
The reforms were launched as Chinese economy last year slipped to 6.9 per cent and the government has fixed 6.5 to seven per cent as GDP target for this year.
The pace of Chinese growth last year was at its weakest since 1990. The slowdown had prompted the International Monetary Fund to cut its global growth forecasts for China to only 6.3 per cent in 2016.
The VAT scheme first started in 2012 as a pilot program in Shanghai, covering a number of services including transportation, IT, and logistics.
It was later expanded nationwide and to cover other businesses.
Over the past four years, the VAT scheme has saved 640 billion yuan in taxes for businesses.