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China To Speed Up Tax Reforms

by Mary Swire,, Hong Kong

26 November 2012

On November 21, in a report, China's Finance Minister Xie Xuren stressed the need to speed up fiscal and taxation reforms, particularly through mineral resource, property and value added tax (VAT) changes.

Overall, he said, the government's objective will be to build China's tax system around taxes on consumption and income, with revenues augmented by other specific taxes, including those introduced for environmental reasons. Taxes would also be used to promote an equitable distribution of income and for restructuring the economy.

For example, China may collect a duty on the use of water by companies to enhance resource conservation and environment protection, while changing the mode of taxation on coal from a volume-based levy to a tax on the sales price, which will increase the burden on mining companies.

Possible changes to resource taxes to reflect supply or environmental concerns, or merely for tax revenue reasons, would, he confirmed, be in addition to the nationwide tax reform in 2011, which altered the taxation of petroleum and natural gas to being based on price so as to restrict energy consumption.

He also confirmed the government's intention to extend the current VAT pilot scheme nationwide, to support the country's service sector which is predominantly composed of small and medium-sized enterprises. Previously, VAT was only imposed on manufacturing companies, but the pilot scheme substitutes it for business tax for transport and selected service industries.

The imposition of VAT is reducing the tax burden on the service sector, as business tax is calculated on a firm's gross revenues, rather than only on added value. It should also avoid double taxation issues in that sector, whereby some products have been subject to VAT after manufacture, and then business tax when sold.

Xie's report also disclosed an increasing role for property taxation, with an extension of the pilot tax that was originally introduced on luxury residential properties in Shanghai and Chongqing last year, as part of the government's effort to try to bring under control the rapid increases that have been seen in the country's real estate prices.

TAGS: environment | tax | business | value added tax (VAT) | sales tax | property tax | mining | energy | China | oil and gas | ministry of finance | tax reform | services

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