China's VAT system a model for other governments: expert

It has been more than a year since Chinese authorities launched a tax reform program to replace the business tax with a value-added tax (VAT). Experts are suggesting the new system has not only created significant benefits in China, but also serves as a noteworthy model for other countries.

Launched on May 1st of last year, the replacement of the business tax with the VAT began in the construction, real estate, finance and consumer services sectors. Since then, total tax reductions through the reforms are estimated at nearly 700 billion yuan. The changes have also streamlined tax collection procedures and lowered collection costs.

Vice Minister of Finance, Shi Yaobin, said the VAT-only system has a lot of advantages over the old system.

"Before, when we still had a business tax, the service sector would have a business tax, while the manufacturing sector had a VAT. There were no reciprocal deductions between them. Deductions weren't really available, and there were also overlapping taxes. But now, all the sectors fall in line under the same tax system," said Shi. 

Businesses say the current tax system provides much better deduction allowances.

Take the restaurant industry for example. While the 5% tax rate under the previous system has been raised to 6%, many more items, such as utilities and material purchases can now be deducted, leading to an overall lowering of the taxes paid.

The implementation of the VAT covers more than 16 million businesses, and 10 million individual taxpayers. 

The banking, insurance and securities sectors have also been added to the new tax system. Historically, implementing a VAT for the financial sector has proven to be a challenge for most governments.

Lachlan Wolfers, a managing partner at global auditing firm KPMG, said the new system being employed by Chinese tax authorities could be a model for other countries.

"The reason why that happened was it was too difficult to measure the value added on a transaction by transaction basis. And I predict, the rest of the world would move towards models of applying VAT to financial services, adopting many of the concepts we have seen implemented here in China," said Wolfers.

Chinese authorities, in drafting and implementing the VAT system, adopted a goal of only lowering tax burdens across all industries. 

"Lowering taxes for businesses has been the biggest and, also the most important effect, of the VAT system. We first began trial runs of the system in 2012. Since that time, companies under the system have seen their taxes continue to come down. That has been true especially since May 1st of last year, when the tax rules were officially launched," said Shi. 

Observers suggest the VAT has also played a vital role in facilitating China's economic growth. 

Last year, amid a slowing of the overall economic growth rate, the GDP in China's tertiary sector increased by nearly 8%, accounting for more than half of China's total GDP. Meanwhile, value added in the advanced manufacturing sector posted year-on-year growth of more than 10%.