Reform good for service sectors

Updated: 2012-02-18 07:31

By Wei Tian and Xie Yu (China Daily)

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SHANGHAI - Vice-Premier Li Keqiang on Friday reiterated the urgency of extending Shanghai's pilot value-added tax reform across the nation to promote a better and faster development of the service sector.

"The (VAT) reform was a big step in China's economic transition and structural adjustment, as well as a major part of the structural tax reduction," Li said at a meeting in Shanghai to review the effectiveness of the reform.

"It could help to eliminate duplicate taxation, to enhance competitiveness of the service sectors, to support the development of smaller businesses and to drive the expansion of employment," he said.

The government will carefully evaluate the pilot program to identify problems and summarize experiences, Li said, adding that the reform in pilot sectors and regions will be gradually expanded across the country within the 12th Five-Year Plan (2011-15).

The State Council approved the pilot program in October to replace the turnover tax with VAT in several service sectors in Shanghai, such as transportation, technical support and the creative industry, starting from Jan 1 this year.

Turnover tax refers to a tax on the gross revenue of a business, while VAT refers to a tax levied on the difference between a commodity's price before taxes and its cost of production.

The current VAT rates in China include two levels - 17 percent and 13 percent - and the pilot program added two lower levels - 11 percent and 6 percent - for the selected sectors.

Zhou Zhenhua, director of the Development Research Center affiliated to the Shanghai government, said that if the VAT reform pilot was fully implemented in Shanghai, it would reduce Shanghai's tax revenue by about 10 billion yuan ($1.59 billion) a year.

Analysts believe that the lower tax will boost the development of logistics and creative industries in Shanghai by attracting nearby companies to the city.

However, Wang Depei, director of Forecast Think Tank in Shanghai, said some companies may face a higher charge than before.

Wang explained that many service companies are registered in Shanghai's suburban district, where local authorities used a lower turnover tax rate to attract more companies, and implementation of the new tax system will rule out the advantages.

Also, he said, for some small accounting firms and law firms, and small companies which run both service and manufacturing businesses, the new tax policy will not reduce their tax burden.

"For these companies, the government should use subsidies or other preferential policies to compensate for their cost, so that the new tax system can be popularized without hurting anyone," he added.

But Han Zheng, mayor of the city, said the tax reform has benefited most of the businesses in the service sectors, especially small and medium enterprises, which account for 85,000 of the 118,000 companies in the program.

China Business News reported that there are already seven other regions ready to participate in the pilot program, including Beijing.

"The extension of this pilot program will definitely be good news for businesses in other provinces," said Xia Linhong, a consultant of the commerce bureau in Wenzhou, the hub of China's private businesses.

"We hope a similar policy will soon be released in Wenzhou as well," Xia said.

Gao Changxin contributed to this story.