All sectors in China now under value-added tax system

Global Business

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All business taxes in China were replaced with value-added taxes (VAT) after the construction, real estate, finance, and consumer services sectors switched to the VAT on Sunday, representing the last four in the country to make the change.

A VAT is a tax levied on the difference between a commodity’s price before taxes and its production cost. A revenue tax refers to a tax on gross revenues.

The expansion of the VAT 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 its manufacturing as the world’s second-largest economy shifts towards more sustainable growth driven chiefly by consumer demand.

Expanding VAT to 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.

“We now have to pay an 11-percent value-added tax compared with 5.5 percent business tax in the past. It appeared that the tax rate had increased but the base on which the tax is collected has shrank so ultimately our tax burden is reduced,” said a treasurer with a construction firm in the northern Chinese city Tianjin who did not give a name.

The VAT scheme first started in 2012 as a pilot program in Shanghai, covering a number of services including transportation, information technology, and logistics. It was later expanded nationwide and to cover other businesses.

Story by Xinhua