Replacing business tax with value-added tax

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Transformation in China's turnover tax system.

The replacement of business tax with value-added tax (营改增) is considered the most significant transformation in China's turnover tax system since the 1994 tax reform. This change aims to maintain the fiscal balance in both central and local governments.

The executive meeting of the State Council, chaired by Premier Wen Jiabao on July 25 of 2012, approved a plan to expand the trials of replacing business tax with value-added tax. According to the plan, transportation and some modern service industries would be added to the trial programs, and the program would be extended from Shanghai to another eight provincial regions and three cities -- Beijing, Tianjin, Jiangsu, Zhejiang, Anhui, Fujian, Hubei, Guangdong, Ningbo, Xiamen and Shenzhen -- from August 1, 2012, until the end of 2012.

At present, China finds itself in a critical stage of transforming its economic development mode as well as the development of its tertiary sector, with the modern service industry in particular. These undertakings play an essential part in adjusting the nation's economic structure and enhancing overall national power.

Replacing business tax with value-added tax is conducive to improving China's tax system and eliminating double taxation; is beneficial to the specialization of social work and integration of three sectors; contributes to reducing the tax cost of enterprises and strengthening their competitiveness; and leads to the optimization of the structures of investment, consumption and export, as well as the promotion of the national economy's development in a healthy and harmonious way.

The national plan for a transition from business tax to value-added tax is divided into three steps. Firstly, a pilot program is only carried out on designated sectors of a certain region. As the first experimental city, Shanghai takes the lead in launching the tax reform on January 1, 2012. Secondly, the trial program will be expanded nationwide across selected sectors.

The abovementioned stage will start at the beginning of 2013 according to the decision of the State Council. Given the current circumstances, it is most likely to initiate the tax reform in transportation and six other modern service sectors. Finally then, the change from business tax to value-added tax will be realized throughout the whole country, namely through the deletion of business tax, which is expected to be achieved during the nation's 12th Five-Year Plan (2011-2015).