Chinese Premier Presses VAT Reforms to Enhance Economic Strength

Chinese Premier Li Keqiang has called for efforts to encourage VAT reform this year as a way of reducing the burden on businesses and boost industrial upgrades.

According to a statement issued on Monday, Jan. 25, following a conference chaired by Premier Li on Friday, Jan. 22: "VAT reform is an important part of China's fiscal and tax reform. Pilot VAT reform has achieved positive results and expanding it across all industries will reduce tax burdens on enterprises, boost the upgrade of industry, and stimulate consumption."

A pilot VAT program slowly expanded after its testing in 2012. As a result, 2016 will see China replacing business tax with VAT in the remaining four industries, such as construction, finance, property and consumer services, according to the Ministry of Finance.

The move resulted into enterprises saving tax over 484.8 billion yuan ($75 billion) from 2012 to the first half of 2015, according to China.org. Tax savings accounted for 0.2 percent of GDP in the period, based on an earlier report released by China International Capital Corp. Ltd. (CICC), China's first joint venture investment bank.

According to Xinhua, once all industries shift to VAT in 2016, the total tax saving will be more than 900 billion yuan or 0.4 percent of GDP.

VAT reform will encourage companies to outsource more services as opposed to adopting a do-it-all business model. The move will promote the development of the service sector and upgrade manufacturing industries.

It is important to motivate market entities as a way of making headway in VAT reforms. Although the government may incur some losses in financial revenue in the short term, this will be recovered through future growth.

It is critical to have careful planning to ensure a smooth execution of the reform. Furthermore, a progressive manner of implementing the VAT reform will be necessary in avoiding adverse effects on the smooth running of the economy.