This article was first published in the September 2017 China edition of Accounting and Business magazine.

The plan to replace mainland China’s business tax (BT) with value added tax (VAT) began in 2008 when the Chinese government approved a five-year plan to overhaul the way in which businesses are taxed.

The reform was rolled out in Shanghai in 2012, with other key cities following suit. The BT-to-VAT conversion was comprehensively introduced in 2016. Four industries, including construction, real estate, finance and lifestyle, have all been brought into the scope of VAT.

The replacement of BT with VAT is regarded as one of the important measures to deepen fiscal reform by the Chinese government and encourage economic development, and is an important tool to promote and grow China’s modern services industry.

Since the comprehensive roll-out in 2016, the government has reduced the tax burden of enterprises. According to statistics, this has brought about a direct tax reduction of 570 billion yuan in 2016. From May to November 2016, the tax burden decreased by:

  • 3.75% in the construction industry
  • 7.9% in real estate
  • 14.72% in the financial sector
  • 29.85% in the lifestyle industries.

The four major industries conducting the VAT reform pilot programme involved 26 segmented industries and more than 10 million pilot taxpayers, in which the tax burden of the majority of enterprises decreased significantly while the actual tax burden of about 1.6% taxpayers increased slightly.

Among the enterprises where the tax burden has increased, most are caused by:

  • a financial system that can’t keep pace with the progress of VAT reform in the transition period
  • an insufficient input tax deduction
  • inaccurate applicable tax rates on the tax declaration
  • inflexible business processes.

Further cuts

The Chinese government will further increase tax cuts for enterprises for the purpose of cooperating with the supply-side structural reform, further reducing the cost to enterprises and helping to enhance market competitiveness in 2017. VAT reform will continue to be enhanced through improving tax collection and administration.  

Earlier this year, in his Report of the Work of the Government, Premier Li Keqiang noted that the government will also take measures in 2017 to increase tax cuts and help the supply-side structural reform. It is estimated that annual tax burden of enterprises will be reduced by 350 billion yuan and the charges levied on businesses will be reduced by more than 200 billion yuan.

These proposed measures are:

1. More small businesses with low profits will enjoy halved corporate income tax, with the upper limit of taxable annual income raised from 300,000 to 500,000 yuan.

2. For small- and medium-sized high-tech enterprises, the proportion of R&D expenses covered by the additional tax reduction policy is to be raised from 50% to 75%.

3. The government will completely overhaul government-managed funds, abolish municipal public utility surcharges, and authorise local governments to reduce and cancel some funds.

4. The government will abolish or suspend 35 administrative charges paid by enterprises to the central government – again cutting the number of charges by more than half – and then reduce as far as possible those that still apply. Local governments also need to make significant cuts to government administrative fees being levied on businesses.

5. The government will reduce government-set operating fees for businesses. Unauthorised fees charged by intermediaries for government review and approval will be overhauled or abolished. The government will work towards lower operating fees levied on businesses in the finance and railway freight sectors, and strengthen oversight over the collection of market-set service fees.

6. The government will continue to lower as appropriate the share paid by enterprises for contributions to social security.

7. The government will deepen reforms and improve policies to reduce government-imposed transaction costs for businesses and lower their energy and logistics costs.

8. The government will implement and improve policies on replacing BT with VAT across the board, simplify the structure of VAT rates, and undertake in 2017 to turn the four tax brackets into three, and create a simple, transparent and fairer tax environment, and further ease the tax burden of companies.

At a press conference of the National People’s Congress and Chinese People’s Political Consultative Conference this year, Premier Li promised that tax and fee cuts will reach 1 trillion yuan for the year 2017 through a series of measures and supply-side structural reform.

Yu Haifeng is president and professor of finance at Guangdong University of Finance and Economics. He also holds a number of senior academic roles in Chinese institutes