Taxation Reforms and Changes in Revenue Assignments in China

IMF Working Papers, July 1, 2004

Source details

The value-added tax (VAT) in China includes capital goods in the VAT base, an unusual feature.
Most services are subject to the business tax, which:
- is not creditable against VAT,
- accrues to local governments,
- operates as a turnover tax.
On grounds of economic efficiency, eliminating these distortions would be desirable so that domestic producers are not increasingly disadvantaged as China dismantles tariff and nontariff barriers on competing goods.
Reforming indirect taxation would generate considerable revenue losses for local governments; in the absence of compensatory mechanisms, there would be significant impediments to the needed reforms.
The paper focuses on:
- the extent of revenue losses,
- their distribution across provinces,
- possible options for compensation.

Reform objective:
- Remove distortions between taxes on goods and services to improve economic efficiency as external protection is reduced.
Main constraint:
- Large revenue losses for local governments from converting business tax liabilities into a VAT-creditable base or otherwise reforming turnover taxation of services.
Core policy question:
- Design compensatory mechanisms to offset local fiscal losses to enable indirect tax reform.

Consumption taxes
Corporate income tax
Revenue administration
Revenue performance assessment
Tax efficiency
Taxes
Value-added tax
Specific keywords: base scenario, business tax, China, Consumption taxes, Corporate income tax, Fiscal Policy, Indirect Taxation, Intergovernmental Fiscal Relations, revenue-returned formula, Tax efficiency, tax revenue, Value-added tax, VAT base, VAT revenue, WP

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