A Study On The Relationship Between Income Tax And Value Added Tax

According to the current theory of taxation, indirect tax is the main tax in Chinese tax structure, while the trend of the world’s tax structure is to get balance between the direct and indirect taxes and even tend to a higher proportion of direct taxes accounted for the tax structure. Thus, according to China’s economic development, level of tax collection and social needs of deepening the reform,academics at home and abroad have put forward that our country needs to increase the proportion of direct taxes, and reduce the proportion of indirect taxes gradually to reach the "double subject" tax structure.At present, "double subject" tax structure, which means the balance of direct tax and indirect tax, is really required in our country. But in my opinion, the current standpoint of the imbalance in tax structure and the method of increasing the proportion of direct tax is debatable. Because these views are based on the view which regards the higher proportion of Value-added Tax(VAT) as indirect tax, thereby the proportion of indirect tax is overstated artificially.Based on the consideration above, in this paper, after studying the current situation of Income Tax and the VAT in domestic and foreign, the essence of two taxes is concluded, that is, Income Tax is a tax on profits of income, the VAT is a tax on added value which makes the profit entity without deduction(close to the gross profit).Both taxes are taxing on profits, so there is a inherent relationship between the two taxes, including the correlation between the income of the Income Tax and the VAT,relationship of overlap between the tax base, and repeated taxation relationship between Income Tax and the VAT.In this paper, relationship of overlap between the tax base is shown from three aspects, the tax base in theory, in law, and in actual inference. It can be concluded that the tax bases(income and added value) both have the same origin and positive correlation with each other.In the current tax theory, the VAT is taxed according to sales income in the form,which is belonging to the indirect taxes, but actually, the VAT is taxed according to the spreads which is the base of profits, and so that the VAT, which should be deducted before income tax, equals to the “prepaid” income tax, forms the repeated taxation between Income Tax and the VAT.According to the analysis of the relationship between both taxes, income is a component part of added value, Income Tax and the VAT are both taxed on added value. Both taxes have only difference of amount but have no essential difference with each other, therefore, they should not belong to different tax categories. In this paper,combined with the comprehensive classification standard of the direct and indirect taxes, it is concluded that the VAT should belong to direct tax, and that direct tax will be the main proportion of tax structure in our country.Based on the above ideas, this paper investigates, studies, and reconstructs the theory of Income Tax and the VAT and the theory of direct tax and indirect tax structure. By defining the VAT as direct tax, this paper makes a positive conclusion on our current tax structure in which the VAT has a larger proportion, innovates the existing theory of direct tax and indirect tax, and the theory of VAT and Income Tax at home and abroad.