China To Pursue Tax Reforms

by Mary Swire, Tax-News.com, Hong Kong

20 February 2012

According to a statement by China’s State Council, after a meeting chaired by Premier Wen Jiabao, the government promised to push forward its structural reform programmes, including tax measures, to improve the country’s economic development and improve people’s living standards.

The reforms, including improvements to pensions and health insurance, and the promotion of both industrialization and agricultural modernization, will include the reorganization of state-owned enterprises into joint-stock companies and the encouragement of private investments in areas previously reserved to the state, such as the railways, banking, energy, telecommunications and education.

The government is to speed up its structural tax reform policies, including pressing ahead with the ‘value added tax (VAT) for business tax’ policy and the expansion of resource taxation.

A pilot scheme to replace the existing business tax on the country’s service sector with value added tax (VAT) started in Shanghai on January 1 this year, and extends VAT, which is currently imposed on manufacturing companies, to selected service industries, such as transport. It is now expected that the scheme will be extended nationwide.

The move is said to be part of a plan to amalgamate all forms of China’s turnover taxes into VAT, over time, and is expected to reduce the tax burden on the service sector, as business tax is calculated on a firm’s gross revenues, rather than only on added value. In addition, it is hoped that the reduced taxation will go some way to help smaller firms in the Chinese services sector that have been greatly affected recently by increased costs and restricted credit.

With regard to resource taxation, in November last year, China extended nationwide a new resource tax on domestic sales of crude oil and natural gas. The new tax is being imposed ad valorem, rather than the previous per tonne basis, and the table of resource tax rates also includes a range of taxes on other minerals, including coal, ferrous and non-ferrous metal ores, salt and rare earths.

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