VAT reform set to go nationwide in August

The reform program to replace the business tax with a value-added tax will be expanded nationwide on Aug 1 in pilot sectors, Premier Li Keqiang said during a key meeting on Wednesday.

The expanded pilot program will also include enterprises in the radio, film and television industries, alongside those in the transport industry and some modern service sectors, Li said during an executive meeting of the State Council.

The companies will pay a value-added tax, which can be deducted along the supply chain, instead of a business tax to avoid duplicated taxation and to benefit from a lower tax burden.

As a vital step in fiscal reform, VAT has achieved remarkable results in easing the tax burden on smaller businesses and promoting economic transformation, Li said.

The nationwide expansion will eliminate policy differences between pilot and non-pilot regions. The program will help cut 120 billion yuan ($19.37 billion) in levies for companies in the pilot sectors in 2013.

The VAT reform was first introduced in Shanghai in January 2012 and was later expanded to other cities and provinces.

"The earlier-than-expected expansion sends a signal that the government is speeding up fiscal reform," said Liu Shangxi, deputy director of the Research Institute for Fiscal Science under the Finance Ministry.

"The new leadership is ready to 'walk the walk', rather than just 'talk the talk'," Liu said, quoting a comment Li made during his first press conference after he took office in March.

In addition, Liu said the 120 billion yuan tax reduction was only a conservative estimate, and the true benefit for companies will be several hundred billion yuan.

In 2012, the VAT reform program helped cut 42.6 billion yuan in taxes for companies in the pilot areas, according to the Ministry of Finance.

Also at the Wednesday meeting, Li said the pilot sector will be expanded to rail transport, the postal service and telecommunications "when the time is right".

Liu said the expansion is likely to take place as early as the beginning of next year. "Some may think the pace of reform is not fast enough, but we should not forget that these steps are being taken amid an economic slowdown and lower fiscal revenue."

Premier Li said with the pilot expansion, the central government will study to better allocate the division of fiscal revenue between central and local governments.