Next step on VAT to reduce levies starting on May 1, premier says

China will cut value-added tax rates as part of a tax reduction package amounting to 400 billion yuan ($63.58 billion) this year to drive high-quality development, a State Council executive meeting chaired by Premier Li Keqiang decided on Wednesday.

The tax rate for manufacturing will be lowered from 17 percent to 16 percent, and for transportation, construction, basic telecommunications services and farm produce from 11 percent to 10 percent.

Li said the reform is a major step in China's tax regime reform.

"VAT reform has helped to reduce the overall corporate tax burden and improve the tax regime. The reform has proved to be conducive to the transformation and upgrading of the economy, unifying the tax structure and making taxation fairer," he said.

"This round of tax cuts will apply to all manufacturing companies. All businesses registered in China, be they joint ventures or wholly foreign owned companies, will be treated equally," Li said.

VAT reform was first tested in Shanghai before it was rolled out nationwide in May 2016. It has delivered a total tax cut of 2.1 trillion yuan in the past five years.

In tandem with the reform, the services sector has expanded significantly. Its added value rose by 8 percent and accounted for 51.6 percent of GDP in 2017, according to the National Bureau of Statistics. The reform has also boosted entrepreneurship, innovation and the development of new industries and new forms of business, officials said. Micro and small firms are considered to have been the biggest beneficiaries.

Li said in his Government Work Report this month that efforts will be made to further lighten the tax burden on businesses. The government will reform and improve VAT, consolidate the three tax brackets into two, adjust tax rates, prioritize lowering rates in manufacturing and transportation, and raise the threshold for annual sales volume for small-scale taxpayers.

As part of the tax cut package, eligible enterprises in advanced manufacturing, services and electric utilities shall receive a lump-sum refund for their initial input VAT payments yet to be deducted.

The meeting also decided to unify the standard for small-scale taxpayers, which raises the threshold of taxable annual sales volume for industrial and commercial enterprises from 500,000 yuan and 800,000 yuan, respectively, to 5 million yuan. Enterprises registered as general taxpayers will be allowed to switch their status to small-scale taxpayers within a given time.

All the tax cuts will take effect on May 1.

The premier said reducing the three tax rate brackets to two in a single step is a hugely challenging job, as reforms are normally pursued step by step. Yet the goal is not beyond reach, he said.

Li stressed that no industry should see its tax burden increase in the course of VAT reform, and that will be the guiding principle for all relevant reform measures.