News Analysis: China presses VAT reform for greater economic vitality

Against a backdrop of greater downward pressure on the economy, China will press ahead with value-added tax (VAT) reform to foster new momentum for sustainable growth.

The plan is to expand a VAT pilot program and replace business tax with the alternate levy across the board starting from May. Details are expected to be released this week, Xinhua-run newspaper the Economic Information Daily reported Monday.

According to an official estimate released after a State Council meeting Friday, the reform will ease taxes by more than 500 billion yuan (76.9 billion U.S. dollars) this year.

The move is part of the government's priorities this year to cut corporate tax burdens, said Wang Jianfan, director of the tax policy department at the Ministry of Finance. "The government is committed to facilitating sustainable economic growth even if it has to face some losses in fiscal revenue in the short run."

Tangible goods have been subject to VAT for some time, but the levy on services is business tax, which is imposed on the value of a firm's sales. Such a crude system results in a tax on tax: it is charged on the taxes already priced in the supplies they buy. VAT avoids this, as it is applied to the value added at each link in the chain of production.

A business tax-to-VAT pilot began in 2012 and has been gradually expanded. It has reduced the tax burden of enterprises, most of which are small companies, by 641.2 billion yuan by the end of 2015.

Starting from May, the program will expand to the remaining four sectors -- 11 percent VAT will be levied on construction and real estate companies, while a 6 percent rate will be imposed on finance and consumer service sectors.

Real estate input, such as factory buildings and offices, will be eligible for VAT deductions, according to a statement released after Friday's meeting. Previously, raw materials and machinery were included in production costs eligible for tax exemption.

Other arrangements have also been made to ensure the reform will reduce corporate tax burdens, the statement said.

However, a lighter tax burden is not the central government's only aim, or it could have just cut business tax rates. An across-the-board replacement with VAT has far more significance on China's economic development.

Expanding VAT reform across all industries will encourage the development of the service sector, support industry upgrade, stimulate consumption and support supply-side structural reform, Premier Li Keqiang said.

"Our aim is to bring all sectors that pay business tax into the VAT system, which will promote the fair development of all sectors and allow the market to play a decisive role," said Zhang Bin, researcher at the Chinese Academy of Social Sciences, a government think tank.

Moreover, the measure has a special significance to the current economic situation. With downward pressure building on the economy, it is particularly important to encourage companies to invest more and expand their businesses.

To make real estate costs VAT deductible, the government is sending a clear signal: It is encouraging investment, said Zhang Lianqi, a partner of Beijing-based Ruihua Certified Public Accountants. Endi