The Impact Of "Replacing Sales Tax By VAT" On Local Governments And The Advice

The China’s government adjusts the fiscal management system and tax structure greatly. In terms of fiscal management system, the previous fiscal management system is replaced by tax federalism; as for tax structure, the original product tax was replaced by VAT and sales tax. This reform reshapes the tax structure of China which is relied on turnover tax and income tax primary. Moreover, the Value-added tax takes up a huge proportion of turnover tax, which is the biggest contributor to China’s fiscal revenues also. On the other hand, sales tax has become the major component of the local tax system, accounting for over 40 percent of local tax revenue. To be honest, the sales tax is the guaranteeing of financial resources for the local government to promote the economic development, provide public goods, and implement macro-control work.On January 1,2012, Shanghai began the implementation of the reform "Replacing Sales Tax by VAT ", which was the start of new tax reform. Overall, this tax reform reduced the corporates’ tax burden while optimized the industrial structure, as well as improved the integrity of the chain of value-added tax furtherly, and effectively solved the problem of double taxation which was induced by the previous sales tax. The implementation of " Replacing Sales Tax by VAT" will accelerate the development of the manufacturing industry and modern service industry since this reform can reduce the double taxation. Therefore, this reform plays a critical role in the adjustment of industrial structure, as well as promoting economic growth. So the reform is also considered to be the most important reform of the tax system since 1994.According to the current China’s fiscal management system, the sales tax is the main part of local government’s fiscal revenue, while the VAT is shared by the central government and local government. " Replacing Sales Tax by VAT " means that the main revenue of local government will be shared with the central government, and the portion belongs to central government is 75%. So this reform changes the original distribution pattern of local and central government, and therefore would have a broad and profound impact on the relationship between central government and local government. Firstly, the theoretical support of" Replacing Sales Tax by VAT " was introduced, describes the status of this reform and incite the Wuzhong District as a example. Based on the theoretical relation of Central and local Government, the impact of " Replacing Sales Tax by VAT " to Wuzhong District was analyzed. Based on the above analysis, we conclude these recommendations:improving the tax structure furtherly, fostering main taxes of the local government after the reform, promote the reform to Tax Department timely.