Research On China’s Policy Of The Business Tax Reform To Levy Vat Pilot

China’s economic structure is currently undergoing transformationdue to resource, environmental, and demographic factors. As oneeconomic center of China, Shanghai is particularly under suchtransformation pressure. The Shanghai municipal government iscontemplating implementation of various national and local strategies,including the four-center plan as well as the evolution of developmentmodel. One key step in further of economic transformation is tosignificantly develop modern service sector, which has alreadycontributed a half of Shanghai’s GDP. Such development needs not onlystrategic perspective, but also various policy initiatives, including the taxpolicy.Traditionally speaking, business tax applies to modern service sector.Nevertheless, the current business tax system has some outdated andsimplified aspects, which become a barrier to the future development ofmodern service sector. As such, economic transformation calls forreplacement of business tax by value-added tax in certain areas. On October26,2011, the State Council decided to expand the application ofvalue-added tax to selected geographic areas and services through a pilotprogram. First, the pilot program would only cover transportationservices and some other unspecified modern service industries inShanghai. It is intended that the pilot program would be expanded toselected service industries nationwide based on the trial experience.Second, the pilot program allows for two more value-added tax rates at6%and11%respectively beyond current13%and17%rates. Third, thevalue-added tax revenues collected in the pilot program would beexclusively allocated to the local government in Shanghai as areplacement of lost business tax revenue, without splitting with thecentral government. To the extent that these covered services in thepilot program previously enjoyed some business tax benefits,corresponding adjustments would be made to the applicable value-addedtax going forward. The amount of value-added tax paid by the coveredservices would be allowed as input credit.This article is to illustrate how the tax policy will play key role indeveloping modern service sector in Shanghai from multiple aspects.This pilot program will be especially critical to the desired economictransformation. The pilot program is expected to avoid double taxationas well as unreasonable tax evasion. Shanghai is picked as the locationof the pilot program due to the unique tax enforcement system and the well-established modern service sector in the city. This article focuseson various difficulties faced by the pilot program in case study and seeksto compare the relative change in tax burden through data. The casestudy is conducted through field work at various local tax bureaus, withan in-depth understanding of the implementation of the pilot program.Finally, this article is to provide an overview of applicable tax policiesuntil January2012and to offer practical recommendations as to theimprovement of the pilot program.