VAT law a welcome move, but still room for further reform

The recent adoption of a law on value-added tax by China's top legislature marks major progress in the country's tax system reform.

China began to pilot VAT collection in selected regions and industries from the late 1970s, gradually expanding the scope of its collection before levying it nationwide after May 2016. Despite important achievements brought about by amending the value-added tax law, the country still needs to improve the VAT system to promote the establishment of a tax system that facilitates high-quality development, social equity and market unity.

To give better play to the advantages of the VAT system, the scope of general taxpayers should be gradually expanded, the input tax credit system should be improved, and double taxation and tax evasion should be reduced. As for small, low-profit enterprises, and individual industrial and commercial households that need preferential tax treatment, the amount of tax exemption can be set and the rate of tax levy can be reduced.

The current tax and levy rates should be simplified to further enhance the neutrality of VAT. For example, the current four tax rates applicable to general taxpayers can be reduced to three, with the basic tax rate being applicable to general commodities, the low tax rate to people's daily necessities, and the zero tax rate to exported goods.

Compared with the current basic VAT rate of less than 13 percent adopted by many developing countries, China's rate of 13 percent is somewhat high. In order to improve people's livelihood, the applicable tax rates for people's daily necessities such as grain, edible vegetable oil, fuel and medicine can be appropriately lowered first.

To give preferential treatment to small, low-profit enterprises and individual industrial and commercial households with low incomes, to promote employment and balance the tax burden, the current VAT threshold system should be changed into a tax exemption system based on a certain amount of revenue, which means that sales income does not have to be taxed in full when it reaches the specified level, but only sales income that exceeds the specified level is taxed.

At the same time, outdated and other inappropriate tax incentives, such as certain tax deductions, input tax deductions, practices that are not only inconsistent with the neutral principle of VAT, but also not conducive to playing the role of VAT "chain mechanism", should be cleaned up to standardize the tax system, enhance taxation transparency and improve taxation efficiency.

21ST CENTURY BUSINESS HERALD