Tax should be reduced before VAT Reform
In 2013, China will expand the pilot reform of replacing business tax with value-added tax (VAT) in several industries nationwide. Based on the reform arrangement, postal and telecommunications services, railway transportation, construction and installation industries shall be included in the pilot reform later, and gradually expand to the whole country. He Keng, vice chairman of the NPC Financial and Economic Committee, thinks the reform can only be good for enterprises. But for the smaller proportion that local governments get after reform, Mr. He indicates that the resistance to the reform comes from local governments instead of enterprises.
Since the start of the reform pilot, there are a lot of different opinions to details of the reform, including VAT rates, calculation methods, taxpayer status, etc. For the structure of the tax system, the value-added tax is the largest tax category, accounting for more than 30% of the total tax revenue, and shared by the central government and the local governments. Business tax is an exclusive tax for the local governments (except for the business tax of a small number of central enterprises is owned by the central government), which is the largest tax category for the local government. The two taxes almost cover all industries, as a result, there’s no wonder of the fierce dispute raised by the reform.
On the surface, VAT reform will reduce the tax burden. Because VAT only levies tax on the value-added part while business tax applies to the whole turnover. Take small-scale taxpayers for example, its business tax rate is generally 5%, but after the reform, it shall be reduced to 3%, which makes the tax burden reduce 40%.
However, the pilot reform in Shanghai showed that the fact was not the case—some enterprises burden more tax. Why? The key point is that whether they can get deductible value-added tax special invoice when they purchase. The reason why the transportation tax burden has increased is precisely because the purchase of vehicles was before the tax reform, which cannot be deductible. More importantly, the business tax levied on service industry, whose procurement is mainly from personal services and suppliers without the qualification to issue value-added tax special invoice. After the reform, these problems still exist, which shall greatly limit the effect of tax cuts.
For example, before the reform, there were a lot of ways to evade tax, but in the system of value- added tax, all circulation shall be levied and then be deducted, these taxes shall be hard to conceal, which shall inevitably result in the increase in the overall tax burden of the overall economy. Therefore, the reform just reduces the nominal tax burden, which does not make any sense. China's nominal tax burden is so high that enterprises can only use a variety of legal or illegal means to evade tax. To make the reform a success, a large amount of hidden tax evasion should be faced up. Only systematic significantly lower the nominal tax burden can possibly achieve the purpose to decrease the actual tax burden by the reform.
Besides, the used core tax of local governments becomes shared tax after VAT reform. Once their fiscal revenues get less, local governments will desperately levy new taxes or raise more governmental funds led to heavier social tax burden, or they will provide much less public service.
In fact, the aim of the whole tax reform should be “determining the income based on the expenditure”. While there’s no change of China’s spend-and-tax fiscal budget system, how to determine whether the current tax burden is reasonable or not? Basically, taxpayers determine the level of the tax burden based on public services they want. When there’s no limit to the power of the government, it’s better to reduce China’s whole tax before any tax reform. At the same time, certain tax legislation should be given to the local governments to make them develop tax policy according to local conditions. This is also an important means to stabilize the current economic and structural issues such as regional economic imbalances.
Originally published on Think-tank Report | 2012-12-1
