Rani Jarkas: The Impact of China’s Tax Reform Will Go Beyond Tax Reduction

Effective as of May 1, China completed the last step in its extensive business tax to VAT reform by extending the previous pilot programs to cover the remaining sectors of finance, services, property and construction. As part of the efforts to reform China’s state-centric fiscal system, VAT reform was first introduced in 2012 as a trial program in Shanghai. Since 2013, the program has been expanded to several other municipalities and provinces and applied to various sectors, including railways, postal services, telecommunications and certain service industries.

The reform was initiated with the aim to reduce the tax burden of businesses, with an estimated 97 percent of tax payers to pay less tax with savings of over RMB 300 billion, according to Shi Yaobin, Vice Minister of Finance.

Premier Li Keqiang said in Beijing on May 19, 2016 that implementation of the VAT reform should ensure that the tax burden is reduced for firms across all sectors. Long before that, he has urged solid efforts to deliver the reform and pledged lower taxes across the board. Wang Jun, Chief of the State Administration of Taxation (SAT) has affirmed to the press that the government has formulated associated policies to support the smooth transition.

In the short term, the government may face a cut on fiscal income, as it is estimated to be about 500 billion yuan, or 77.3 billion U.S. dollars of tax cut for corporations by the end of 2016. While in the long term, this reform pushes forward structural reforms, especially supply-side reforms, realizing a mutual benefit for both the government and enterprises.

Wang Kang, Deputy Director of the State Administration of Taxation concluded that the business-tax-to-VAT reform has far more significance on China’s economic development than just simply reducing the tax burden. Expanding VAT reform across all industries will encourage the development of the service sector, support economic transformation and industry upgrading, and mobilize the initiative of companies, especially in sectors that highly rely on innovation and entrepreneurship like TMT and life science industries.

Rani Jarkas, Chairman of Cedrus Investments, who is an investment pioneer with years of financial experience in Aisa, said, “The business-tax-to-VAT reform will reinforce the current performance of the economy, allow the market to play a decisive role, and eventually sustain momentum of its future development. We believe the reform will help China achieve its goals of economic sustainability and political stability, becoming more attractive to international companies.”