China's VAT reform expected to complete in H1 2016

BEIJING - Changes to China's value-added tax (VAT) policy are expected to be complete by the first half of 2016, ending industry's dual tax system, a report said Wednesday.

The two systems are business tax, which refers to a levy on the gross revenue of a business. While VAT refers to a tax levied on the difference between a commodity's price before taxes and its cost of production.

Manufacturing entities have been subject to VAT since 1994. Other businesses continued to pay the business tax until a pilot scheme on business tax-to-VAT was tested in 2012 in Shanghai, and found to be successful.

It was a success, and by August 2013 the policy was rolled out across the country. However, four service industries -- construction, real estate, finance and consumer services -- are still subject to business tax, according to a report by China International Capital Corp Ltd (CICC), the country's first joint venture investment bank.

One main objective of VAT reform is to alleviate the corporate tax burden. From 2012 to the first half of 2015, the measure has resulted in tax savings of over 484.8 billion yuan ($75 billion), accounting for 0.2 percent of GDP in the period.

Once all service players shift to VAT, by the first half of 2016, the overall tax saving will be in excess of 900 billion yuan, or 0.4 percent of GDP, CICC predicted.

VAT will encourage firms to outsource more services rather than adopting a do-it-all business model, promoting the development of the service sector and the upgrading of manufacturing industries, the report added.