CRI听力:VAT Trial in Shanghai to Expand Nationwide

China is replacing the current business tax with value-added tax or VAT and widening the pilot program nationwide.

Post and telecommunications, railway transportation and construction industries are believed to be the next group of industries that will be added to the VAT plan.

Shanghai was the first city to implement the pilot program at the beginning of this year. Later, it has been extended to 9 provincial regions and 3 cities.

Wang Weiqing,a council member of the China International Taxation Research Institute, elaborates the two most important changes.

"First, it has rooted out the issue of double taxation of business tax. Second, it has unblocked the hurdles of discount for VAT in the circulation. The reform has cut more than 17 billion yuan of the tax burden so far for the companies involved."

An Xiumei, professor at the Finance and Public Management School with Central University of Finance and Economics, says with the VAT expansion, more small and medium sized enterprises will benefit.

"From the tax ratio perspective, an 11 percent VAT seems much higher than the 3 percent seen in the business tax. But the VAT is levied only on the new value created at each stage during its production. Well, the business tax weighs down on the entire turnover, so the accumulated tax will be larger at last."

Wang Weiqing adds the service sector, which includes research and development, cultural and technological services, will particularly benefit from the tax reform.

"Why so we say the VAT reform actually promotes the development of the service industry? That's because it helps add more clients and spurs downstream customers to make more purchases. Moreover, the rest of the revenue after the VAT refund can also enjoy an income tax deduction."

Shanghai's service sector has been propelled by the VAT reform to grow over 10 percent so far, higher than the average 7 percent GDP growth.

However,An Xiumei adds the new policy also leads to a problem, the so called Tax Low-lying Land phenomenon.

"After the VAT reform took effect in Shanghai, firms located in surrounding areas such as Zhejiang and Jiangsu provinces say they prefer to do business in Shanghai rather than in their hometowns. Even cities like Wuxi where the investment environment is good hold the same idea as well. And that's contributing to the Tax Low-lying Land phenomenon."

Another apparent phenomenon is the decreased revenue of the central government. The Ministry of Finance is reporting fiscal revenue in September has come in at around 826 billion yuan, decreased 2.4 percent year on year.

It is expected that tax collections will further slow down at the central government level as the reform gradually gathers strength.

For CRI, I'm Shen Ting.