VAT to ease firms' burden, boost growth

During the initial stages of the pilot reform, the newly collected VAT revenue was allocated to the local authorities, which won the support of local governments and helped promote the program. But with the all-round implementation of tax reform, this arrangement has to be changed, because it is equal to dividing the VAT revenue between the central and local authorities on the basis of classification of industries.

Owing to technological progress and the development of emerging industries, the distinctions among various industries are becoming more and more vague, which means there should be a more appropriate way of dividing the VAT revenue between the central and local governments.

In the short term, it would be more pragmatic to increase the proportion of local authorities' share in the VAT revenue if there is no fundamental reform in fiscal relations between the central and local governments. If the local government's share of the VAT revenue could increase to 50 percent from the current 25 percent, it may solve the problem of insufficient local fiscal revenue.

The all-round pilot tax reform faces challenges, but it provides a very good opportunity to the authorities to correct the errors in the tax system by, for example, establishing a normative VAT system through legislation as soon as possible.

The possible legislation should consider merging (and gradually reducing) the different tax rates into the VAT to simplify the new tax structure. In addition, the range of VAT input tax deduction should be further regulated, because neutral VAT requires only levying tax on the added value parts.

Besides, the possible VAT legislation should properly deal with tax exemptions for special industries, including finance and agriculture, in order to establish a modern VAT system.

The author is a researcher at the National Academy of Economic Strategy, Chinese Academy of Social Sciences.