VAT reform: a critical step in China's supply-side reform

BEIJING - The myth about China's slower growth has often clouded people's judgment about the quality of its economy, as we all tend to believe faster is better, and an economy losing steam means it is on the brink of collapse.

Most China watchers still need time to realize that the current transitional period of the world's second largest economy encompasses massive reforms that incubates fresh impetus for robust growth in the years to come.

A good example is a recent announcement by China's Ministry of Finance to set a May 1 deadline for completely replacing business tax with value-added tax (VAT) , cutting an estimated 500 billion yuan ($773 billion) of tax for corporations by the end of 2016.

"This major favorable policy will boost China's attractiveness as a hot bed for investment and innovation," said Guo Shengxiang, dean of the Australian think tank Academy of APEC Creative Finance, explaining that the lessening of the tax burden will be beneficial for the many market players to go forward with a lighter burden, and will give a powerful impetus to promotion of market-oriented investment and technology upgrade.

Such a bold step of tax cut, especially in the services sector, is not just a short-term fiscal stimulus, but a far-reaching reform measure that removes economic distortions and improves business environment for the long run.

The Chinese government has long imposed VAT on tangible goods, but services are instead subject to business tax, which is imposed on a firm's sales, including cost. Such a crude levy charges firms offering services a tax on tax.

In January 2012, China extended the scope of VAT levy to include a variety of services, and Shanghai became the first city to operate pilot projects of reform leading to full-scale application of the VAT system. Now the Central Government wants to expand operation of pilot projects thereof nationwide covering all industries.

Starting from May 1 this year, the replacement of business tax with VAT will be extended to the fields of construction, real estate, finance and consumer services -- the lion's share of the source of business tax and the most difficult part of the VAT reform.

An across-the-board replacement with the VAT will lower tax burdens on all industries, streamline tax-paying processes and benefit small businesses in particular, encouraging more investment, entrepreneurship and innovation in the economy.

Besides, Dan Lange, Global Managing Director of Tax and Legal at Deloitte, said in an earlier interview with Xinhua that such a reform could have global significance.