Under the current economic situation, what major significance does the VAT transformation reform have in sustaining the steady and relatively fast development of our country’s economy?
The VAT transformation reform allows the input credit for the purchase of capital equipment to be offset against the output VAT. That will eliminate the double taxation resulting from the adoption of the production-type VAT system, reduce the
tax burden for investment in capital equipment, and a major tax cutting policy without introducing a change in the urrent tax rates. Since it can avoid double tax in the purchase of capital equipment, it will encourage investment, increase the demand in the domestic market, promote technological advancement, adjust the industry structure and the transformation pattern of the economic growth. Currently, the financial tsunami triggered by the sub-prime mortgage crisis has spread to Europe,Asia, and Latin America. Global economic growth rate has obviously been slowed down. Some countries have shown signs of economic recession. The financial crises have adverse impact on the real economy.
In view of such situation, the introduction of VAT transformation reform will perform the important function of boosting the development of the enterprises, improving the competitiveness of the Chinese enterprise and the capability to cope with risks, and overcoming the adverse influences on China economy brought about by the international financial crises. According to estimates, the reform will cause fiscal revenue to drop by over RMB120 billion, and is the single largest tax cut in the history of the PRC. It is believed that the reform policy will have a positive impact on the sustained steady and relatively fast development of our country’s economy.
The VAT reform plan was tabled during the third plenary session of the 16th Central Committee of the Communist Party of China (the CPC), and the reform must be completed during the period of the 11th five-year plan in China. Since 1st July 2004, the experimental trials have been completed in the North East and Central part of China. The experimental trials were successful and have achieved the expected target. The 2008 State Council Work Report officially kicked off the reform plan for VAT system transformation. In the same year the 11th Session of the National People’s Congress examined and approved the report of the fiscal budget committee of the 11th Session of the NPC, which provides that the reform shall commence in 2009. The State Council decides to commence the transformation reform and perfect the VAT system of our country in order to meet the requirement of scientific
development of the tax system, finally perfect the VAT system and create the condition for the enactment of the VAT law by the NPC Standing Committee in five years’ time.
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