VAT replacing business tax: A major tax reform in China

The Chinese government introduced a new tax system in 1994 in pace with the rapid progress of economic reform towards a market-based socialist economy. The tax system relies mainly on indirect taxes, such as value-added tax (VAT), business tax (BT) and consumption tax, to collect tax revenues, i.e., VAT is levied for all manufacturing and merchandising industries, while BT is imposed on communication and transportation, telecommunication, postal, financial, transfer of properties and other service industries. Over the last two decades, VAT and BT have been the most significant sources of tax revenue for governments in China. Responding to the global financial crisis in 2008, the Chinese government implemented a major amendment of VAT in 2008-2009 as part of the economic stimulation program, i.e., extending VAT deduction allowance to the acquisition of fixed assets in order to provide incentives for business enterprises to increase investment in fixed assets and speed up technological upgrading and innovation, as well as to raise their operating and competitive advantages.