China’s state council has approved a pilot program that aims to replace the existing turnover tax with a value-added tax (VAT).

While the pilot program starts January 1st 2012 in Shanghai, it is considered a prelude to a significant overhaul of the country’s tax regime, with the intention of producing a fairer economic system. This initial phase involves replacing the turnover tax with a VAT in certain service sectors, such as transportation.

If the pilot proves successful, the VAT regime will be rolled out to more service sectors across the country and eventually VAT will be applied to all sectors nationwide.

The change in taxation measures is expected to benefit companies currently dealing with increased operational costs, while benefits to consumers will be minimal. The policy change should also help smaller firms struggling with credit woes amid tight monetary conditions, officials said.

The turnover tax is a tax on the gross revenue of businesses, while VAT is a tax on the difference between a commodity's price before taxes and its cost of production.

Under the reform, VAT rates will be range between six per cent and 11 per cent.

For businesses trying to grasp such changes in taxation in China, a partner skilled and experienced in such matters can eliminate the headaches. For instance, ICS TRUST’s Virtual Chief Financial Officer (VCFO) delivers Hong Kong-based expertise for handling tax affairs in China.

By Herb Shoveller