BEIJING-- Who will benefit the most from China's newly passed value-added tax reform? Consumers, it is really hard to say that.

The State Council last week approved a pilot program to replace the turnover tax with a value-added tax (VAT) in Shanghai from January 1, 2012.

This pilot program would probably be the first step in the adjustment of China's taxation structure in the coming years, noted Lu Zhengwei, chief economist at Industrial Bank.

It aims to diminish double taxation and reduce tax burdens for the service sector, said Jia Kang, director of the Research Institute for Fiscal Science under the Ministry of Finance.

It is key to a bigger overhaul of China's tax regime that is aimed at producing a fairer economic system.

The turnover tax refers to a tax on the gross revenue of a business, while a VAT refers to a tax levied on the difference between a commodity's price before taxes and its cost of production.

According to the Ministry of Finance, the government collected 7.13 trillion yuan in taxes during the first nine months of 2011, of which the VAT accounted for 1.82 trillion yuan.

The value-added tax and business tax were the No. 1 and No. 4 top earners in China's tax revenues in 2010. The value-added tax accounted for 29 percent and business tax, 15 percent.

Under the reform, VAT rates will be lowered from current 17 percent and 13percent to 11percent and 6 percent.

The two new lower tax rates are an important step toward the enhancement of the tax mechanism, and will resolve the issue of duplicate taxes and lower the tax burden, according to Liu Shangxi, vice president of a research institute under the Ministry of Finance.

Beneficiary

"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 added 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.

Certainly, value-added tax will lessen the tax burden of producers, and for them the tax abatement would be remarkable.

But that does not mean a direct decline in goods' prices consumers buy.

It has a limited effect on the price of end products because price changes depend largely on the supply-demand relations, according to Liu Shangxi.

If a product was oversupplied, its price may drop albeit a tax increase, but if the supply fell far short of demand, the price would skyrocket regardless of a tax increase.

Therefore, consumers would better not expect too much from this value-added tax reform.

In addition, replacing the business tax with VAT will reduce local governments' fiscal revenue substantially.

VAT is one of those taxes whose proceeds are split between the central and local governments. Currently VAT is split 3:1 between central government and local governments, unlike the business tax which all goes to local governments.

So it is too early to predict what this reform will bring us.