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China benefits from expansion of value-added tax trial
By Tom Byrne and David Erickson |
August 1, 2012, Wednesday
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Print Edition
Print Edition
LAST Wednesday, China's State Council announced that it will expand a pilot value-added tax (VAT) program in Shanghai to 10 more cities and provinces starting on August 1.
The expansion of the VAT indicates that the government is satisfied with the results of the initial pilot program in Shanghai and that it will eventually extend the VAT nationwide.
The shift to a VAT is credit positive for China because it will lessen the burden on the private sector by removing duplicate taxation on goods and services and will help boost private sector activity in small and medium-size businesses, the largest source of job creation in the Chinese economy.
China first introduced the pilot VAT program in Shanghai on January 1, 2012, replacing the former business tax - a levy on gross revenue - with a VAT imposed on a variety of service industries, including transport services, information technology, consulting, logistics support, and research and development.
The State Administration of Taxation estimated that nationwide replacement of the business tax with the new VAT would boost GDP growth by 0.5 percentage point and export growth by 0.7 percentage point, while helping create about 700,000 jobs.
The pilot VAT program will expand this year to the cities of Beijing, Tianjin, Shenzhen, Xiamen, and the provinces of Guangdong, Jiangsu, Zhejiang, Anhui, Fujian and Hubei.
Most of the new locations are in relatively developed coastal regions that have a more advanced administrative and business infrastructure within which to implement the VAT across a large number of companies.
The State Council also indicated that it will expand the pilot VAT program further next year, although it did not indicate to which cities or provinces.
In the Shanghai trial, overall tax revenues increased by 6.8 percent year over year in the first half of the year to 215.8 billion yuan (US$33.9 billion), according to the Shanghai Statistics Bureau.
The city's business-tax revenue in the first half fell 12.6 percent year over year to 50.4 billion yuan, while VAT revenue rose by 51.3 percent to 33.8 billion yuan, Shanghai Statistics Bureau data show.
Although Shanghai's revenues rose as a result of adopting the VAT, China's objective in implementing the VAT was to improve tax certainty for businesses and increase the central government's control over fiscal resources and policy.
Boosting government revenues was not the priority, as even without the VAT trial, China's state budget revenues as a share of GDP have increased steadily to 22.6 percent in 2011 from 15.2 percent in 2001.
The business tax, which the VAT replaces in many sectors, is collected by the local tax bureau and the local government keeps the revenues.
The local branch of the State Administration of Taxation collects the VAT, directing 75 percent of the receipts to the central government and 25 percent to the local government.
Tom Byrne is a senior vice president and regional credit officer with Moody's Investors Service. David Erickson is an associate analyst with Moody's Investors Service. The opinions expressed are their own.
The expansion of the VAT indicates that the government is satisfied with the results of the initial pilot program in Shanghai and that it will eventually extend the VAT nationwide.
The shift to a VAT is credit positive for China because it will lessen the burden on the private sector by removing duplicate taxation on goods and services and will help boost private sector activity in small and medium-size businesses, the largest source of job creation in the Chinese economy.
China first introduced the pilot VAT program in Shanghai on January 1, 2012, replacing the former business tax - a levy on gross revenue - with a VAT imposed on a variety of service industries, including transport services, information technology, consulting, logistics support, and research and development.
The State Administration of Taxation estimated that nationwide replacement of the business tax with the new VAT would boost GDP growth by 0.5 percentage point and export growth by 0.7 percentage point, while helping create about 700,000 jobs.
The pilot VAT program will expand this year to the cities of Beijing, Tianjin, Shenzhen, Xiamen, and the provinces of Guangdong, Jiangsu, Zhejiang, Anhui, Fujian and Hubei.
Most of the new locations are in relatively developed coastal regions that have a more advanced administrative and business infrastructure within which to implement the VAT across a large number of companies.
The State Council also indicated that it will expand the pilot VAT program further next year, although it did not indicate to which cities or provinces.
In the Shanghai trial, overall tax revenues increased by 6.8 percent year over year in the first half of the year to 215.8 billion yuan (US$33.9 billion), according to the Shanghai Statistics Bureau.
The city's business-tax revenue in the first half fell 12.6 percent year over year to 50.4 billion yuan, while VAT revenue rose by 51.3 percent to 33.8 billion yuan, Shanghai Statistics Bureau data show.
Although Shanghai's revenues rose as a result of adopting the VAT, China's objective in implementing the VAT was to improve tax certainty for businesses and increase the central government's control over fiscal resources and policy.
Boosting government revenues was not the priority, as even without the VAT trial, China's state budget revenues as a share of GDP have increased steadily to 22.6 percent in 2011 from 15.2 percent in 2001.
The business tax, which the VAT replaces in many sectors, is collected by the local tax bureau and the local government keeps the revenues.
The local branch of the State Administration of Taxation collects the VAT, directing 75 percent of the receipts to the central government and 25 percent to the local government.
Tom Byrne is a senior vice president and regional credit officer with Moody's Investors Service. David Erickson is an associate analyst with Moody's Investors Service. The opinions expressed are their own.
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