VAT reform drives economic structure adjustment

Zhang Lei and Feng Jianmin

THE highly anticipated value added tax reform launched three months ago is progressing well in Jiading District, and industry insiders believe that it will drive economic structure adjustment.

From January 1, Shanghai businesses in the transportation, construction and certain modern services industries, such as research and development, information technology, cultural products, leasing and consulting, began accounting for VAT instead of the business tax on the services they provide.

The VAT rates applicable to each of the selected industries are 17 percent for leasing of current tangible assets, 11 percent for transportation and construction, while 6 percent for modern services.

District authorities said eight out of nine sectors that previously paid business tax are involved in the reform. Of Jiading District’s 109,300 companies, 18,300 need to shift from business tax to VAT.

Lighter tax burdens

Authorities said that tax in the circulation industries, including transportation, telecommunications, research and technology services, and logistics, has always been high and unreasonable. Various taxes often overlapped. Through eliminating the duplicated tax through VAT reform, companies will face lighter tax burdens.

For example, Shanghai Qisheng Logistics Co, whose yearly turnover is expected to be 10 million yuan (US$1.58 million) this year, can reduce its tax by 50,000 yuan a year.

In general, the VAT reform is an important structural tax-reduction policy. An official at the district’s finance department said: “Through preferential tax rates and transitional policies, the sectors involved in the reform will face no increase in tax overall. The current VAT payers will also enjoy lower tax as their purchases from the new VAT payers are deductible.”

He said that even though revenue from tax may decrease in the short term, the impact could be eliminated in the longer term when the service industries prosper. Fiscal revenue will not be impacted much.

The reform has enhanced Jiading District’s competitive advantage to some extent. Industry insiders said that several logistics companies in Shanghai’s nearby Taicang City, Jiangsu Province, have moved their headquarters to Jiading District to benefit from the new tax policies.