BEIJING, Oct 26 – China is set to reduce the tax burden for some services firms from next year by replacing their business tax with a value-added tax, the state Cabinet said today after a regular meeting.
The amendments are key to a bigger overhaul of China’s tax regime that is aimed at producing a fairer system after tens of thousands of Chinese protested against income taxes which they said were too onerous for the poor.
Chinese manufacturers currently pay a value-added tax that is levied on their profits, while firms in the services sector pay a business tax that is based on their sales revenues.
But under a pilot plan to be trialed on some services firms in Shanghai, the business tax would be scrapped and replaced by a value-added tax.
However, services firms would only need to pay a value-added tax of 6 per cent or 11 per cent, well below the 13 per cent or 17 per cent that manufacturers pay.
“The tax reform will benefit most companies which are facing increasing operation costs in the services sector, such as transportation firms,” said Wang Han, an analyst at Industrial Securities in Shanghai.
Wang said the move is also part of a selective easing in China’s economic policy to help smaller firms, which are suffering from a credit crunch amid tight monetary conditions.
The trial, announced by the government on its website after a weekly state Cabinet meeting, would kick off with transportation and services firms in Shanghai.
The value-added tax and business tax were the No. 1 and No. 4 top earners in China’s tax revenues in 2010, when earnings hit 7.3 trillion yuan (RM3.95 trillion). Value-added tax accounted for 29 per cent and business tax made up 15 per cent.
But this system has drawn criticism because many products wind up getting taxed twice by the value-added tax and business tax while they are being manufactured and sold. – Reuters