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Reform of VAT likely to ease tax burden on sectors

2018-04-02 3 ℃

CHINA’S new value-added tax reform measures are expected to reduce the burden on a range of sectors in the real economy, analysts said.

China will cut VAT rates as part of a tax reduction package amounting to 400 billion yuan (US$63.6 billion) this year, according to a decision made at a State Council executive meeting on Wednesday.

Starting from May 1, the tax rate will be cut from 17 percent to 16 percent for manufacturing and some other industries, and from 11 percent to 10 percent for transport, construction, basic telecommunication services, and farm produce.

While it will be only a 1 percentage point cut in each tax bracket, the reduction will impact a wide range of sectors in the real economy, according to Li Xuhong, a researcher with Beijing National Accounting Institute, a government think tank.

It was estimated the reduction of taxes from lower VAT rates could reach 240 billion yuan. Li said the estimate was rather conservative, as tax cut in the manufacturing sector alone could reach that amount.

VAT cuts in the transport industry will lower the logistics costs for the real economy, Li said.

China International Capital Corporation estimated that firms in the two tax brackets will see their VAT tax burden drop by 6 percent and 9 percent, respectively.

“We believe that lower VAT rates will help reduce the prices of products and services in a number of competitive sectors, benefiting households and other sectors,” CICC said in a research note.

In addition to the VAT rates cut, the reform also offers tax incentives for some high-tech companies, a measure that analysts said is aimed at supporting innovation-driven growth.

Eligible enterprises in advanced manufacturing, modern services, and electric utilities will receive a lump-sum refund for their input VAT payments yet to be deducted.

The measure will have a “far-reaching impact,” said Li, as it could release capital previously frozen on companies’ balance sheets.

However, successful implementation of the refund policy depends on advanced tax collection measures and the overall level of honesty of taxpayers across society, Li noted.

The reform also includes measures to unify the standard for small-scale taxpayers, as it raises the threshold of taxable annual sales volume for industrial and commercial enterprises from 500,000 yuan and 800,000 yuan, to 5 million yuan.

“Raising the revenue ceiling to 5 million yuan for industrial and commercial sectors will help level the playing field and support the growth of medium and small firms in all sectors,” CICC said.