Experts have described it as the most significant tax and fiscal reform in decades as it further improves the country’s tax structure and will sustain economic growth in the long run.
“The reform will reinforce the current performance of the economy, allow the market to play a decisive role, and eventually sustain momentum of its future development,” said Rani Jarkas, chairman of Hong Kong-headquartered financial services firm Cedrus Investments.
Starting from May 1, the VAT replaced business tax (BT) in the sectors of construction, real estate, financial services and consumer services to avoid double taxation, a move expected to slash taxes by over 500 billion yuan (76.9 billion U.S. dollars) in 2016 alone.
The latest extension came four years after the first trial run of the services sector VAT reform in the financial hub of Shanghai. With that, the VAT has essentially taken the place of the BT in all sectors.
The VAT taxes only the value added at each link in the production chain. It is in line with international practices and more efficient as it avoids the double taxation of the BT regime, which is based on the gross revenue of a business, including the cost of input.
Premier Li Keqiang has urged solid efforts to deliver the VAT reform and pledged lower taxes across the board.
It is expected to directly help the tertiary industry, which makes up more than half of the Chinese economy and is critical to China’s economic transition. Traditional manufacturing businesses stand to benefit too, as they enjoy more deductibles under the unified tax regime.