China’s newest VAT reform focuses on tax cuts

Editor's note:Weng Wuyao is the director of the Institute for Research of Fiscal (tax) and Financial Laws of CHINA University of Political Science and Law. The article reflects the author's opinion, and not necessarily the views of CGTN.

Although the value-added tax (VAT) is collected by all sellers in each stage of the supply chain, due to its specific functioning mechanism of credit-invoice (deduction) method, economically the VAT works as an indirect tax borne by end consumers,at least from the theoretical perspective.

The VAT is the world's most common form of consumption tax as it raises significant revenue and is relatively easy to administer. This is also found in CHINA's VAT and undoubtedly, CHINA's VAT experiences have contributed and will further contribute to VAT's great success in the world, in particular after the implementation of the newest round of reform.

On March 20, 2019, the Ministry of Finance, the State taxation Administration and the General Administration of Customs jointly announced a new package of VAT cut measures which came into effect on April 1, 2019. It follows the VAT reform policy decided by the State Council of CHINA, including the reduction of tax rates (from 16 percent to 13 percent for standard rates and from 10 percent to 9 percent for reduced rates), a 10-percent additional deduction for supply of certain services (e.g. modern services),input VAT credits for domestic passenger transport services, full input VAT credit forimmovable property (claimable in full in one time) and VAT refunds for excess input VAT credits for trial.

It is obvious that except for the reduction of tax rates, all the tax cut measures run through the VAT deduction mechanism by which the economic operators such as manufacturers,distributors and retailers can get rid of the input tax burden they bear.

A taxpayer service hall in Handan, Hebei Province, April 1, 2019. /VCG Photo

On the one hand, the output tax these economic operators have to pay will be reduced due to the reduction of tax rates, and on the other hand, the input tax credit these economic operators can enjoy will relatively increase and be realized with fewer obstacles due to improved deduction mechanism, and the VAT burden (more or less) that economic operators cannot avoid will significantly be reduced.

Finally, it is undoubted that the end consumers will benefit from the effects of the tax cuts too.

The newest VAT reform has important significance.

Firstly, because of tax cut measures relating to the VAT deduction, the VAT taxpayers' right to deduct input tax will be better guaranteed. This means that CHINA has taken further steps forward in applying the pure VAT system in which the VAT is imposed on priVATe consumption, as indicated at the very start.

Besides, VAT is currently the most important tax (measured by revenue) among a total of 18 taxes in CHINA and accounts for approximately 40 percent of the total tax revenue. Therefore, the tax cut mentioned here will help perfect CHINA's tax system, such as making indirect taxation account for a smaller share of the future tax system, compared to direct taxation which focuses more on the equity value.

Moreover, from a global perspective, the reduction of VAT rates makes the Chinese market more attractive for foreign investors, in particular, compared to the European Union market in which much higher VAT rates apply.

Shanghai Municipal tax Service of State Administration of taxation in Shanghai, CHINA, March 29, 2019. /VCG Photo

Among the tax cut measures relating to the VAT deduction, some like the additional deduction represent the innoVATive practice around the world and CHINA's VAT policy may act as an international best practice.

Furthermore, the reform will bring about some positive social effects. For example, the tax cut will increase the disposableincome of both the economic operators and end consumers, and accordingly, this will stimulate consumption and further CHINA's economic development.

Last but not least, it should be indicated in particular that the newest reform and the previous reforms of VAT pave the way to forthcoming VAT legislation in CHINA.

It means that according to the principle of statutory taxation, the current VAT regulation should be transformed into VAT law which should be enacted by the National People's Congress, but the implementation of the principle of statutory taxation is not just about the transformation of the VAT legal source, but also implies the perfection of the VAT system in terms of substantive content.

And from the latter's perspective, the newest reform has made CHINA's VAT system more perfect and the related rules relating to this reform can and should become the important content provided in future VAT laws which will supply the taxpayers with strong legal certainty in respect of the tax cut measures introduced by this reform.

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