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Tax reform

By The Economist
From The Economist
Published: March 19, 2013

Mar 2nd 2013 | HONG KONG |From the print edition

China's most underrated sector benefits from an undersold tax reform.

IN DEMOCRATIC countries the tax code bends to popular pressures. In China it is more of an instrument of economic engineering. In 2006 the government removed the last of its ancient taxes on agriculture, hoping to narrow the rural-urban divide. Now it is reforming the taxation of services, aiming to boost a sector that creates more jobs, less dirt and almost as much output as industry.

The reform extends China's value-added tax (VAT) to a variety of services (see table). Shanghai was the first city to take the plunge in January 2012. The scheme has attracted only a fraction of the popular attention paid to the city's property tax, introduced a year earlier, but it has achieved far more significant results.

Unlike the property tax, which remains confined to Shanghai and Chongqing, the VAT on services has quickly spread to other cities and neighbouring provinces. Lachlan Wolfers of KPMG, an accounting firm, says he expects the reform to expand nationwide by the end of this year.

China's government has long imposed VAT on tangible goods and the tax now contributes a quarter of its revenues. But services are instead subject to the so-called "business tax" (BT). This crude levy is imposed on the value of a firm's sales. Unfortunately, that value reflects the cost of its inputs, which includes the tax charged by the firm's suppliers. BT thus obliges service firms to charge a tax on a tax: they must charge it on the taxes already priced in to the supplies they buy.

In principle, VAT avoids this cascade. Firms charge the tax on their sales, as before, but when they hand over the proceeds to the taxman, they can claim an "input credit", deducting the VAT they have themselves paid on their supplies. The tax falls only on the value added at each link in the chain of production.

China's finance ministry boasts that the VAT has so far eased taxes by over 40 billion yuan ($6.4 billion). Small companies have enjoyed an average cut of 40%. In some cities firms can even apply for a partial refund if the test scheme raised their tax burden. But if a lighter tax burden was the ministry's only aim it could have simply cut BT rates. The true test of the reform is not the revenue it forgoes, but the economic distortions it removes.

Unfortunately, the experiment is hampered by its incompleteness. Ever since Deng Xiaoping urged reformers to cross the river by feeling for the stones, policymakers have preferred to start innovations on a small scale. With VAT reform, this made sense. A big bang could have overwhelmed companies, which need to change their invoicing systems, and exposed local governments to unpredictable revenue losses, says Robert Smith of Ernst & Young, an accounting firm.

But VAT works best when it encompasses every link in the production chain. China's small-bang reform is limited to seven services and a dozen localities. Since firms outside the scheme's scope do not charge VAT, they cannot claim back any of the tax paid on service inputs. The experiment has, in effect, created cross-border transactions within China. And what if a mix of services—some subject to VAT, others to BT—is bundled into a single contract?

The loudest complaints have come from transport firms. They used to pay 3% business tax (many others paid 5%). Now they must pay 11% VAT (many others pay just 6%). They cannot deduct the cost of road tolls or insurance, says Teresa Lam of Fung Business Intelligence Centre, a research firm. And they can only deduct the VAT paid on lorries when they buy a new one. A trial limited to certain places was always going to create problems for an industry that carries things from one place to another. When VAT is extended to telecoms—perhaps as soon as July—Mr Wolfers hopes it will apply nationwide.

Despite these difficulties, the VAT reform is beginning to bear fruit. The tax's predecessor encouraged firms to do things in-house to minimise the number of transactions subject to BT. The new tax allows a more natural division of labour. Steel firms are spinning off their transport divisions, according to China's newspapers, and pharmaceutical firms are creating separate research units. China's sprawling business groups can now create a single back-office for the entire group. If a company has 50 legal entities in China, it does not need 50 accountancy directors and 50 tax directors. These benefits will encourage the government to expand the scheme further. And the broader the VAT's scope, the better it will perform.

From the print edition: China

「營改增」造福中國服務業

2013-03-06 天下雜誌 517期 作者：經濟學人

中國實施服務業稅改「營改增」，部份消除了過去一頭牛剝兩層皮的重複課稅問題，已減免了超過四百億人民幣的稅收。有利中小企業，也有助於中國經濟往服務業轉型。

在中國，稅制是干預經濟的工具。二○○六年，政府取消了古老的農業稅，希望能縮短城鄉差距。

現在服務業的稅制改革，主旨則是希望能夠推升服務業。服務業與製造業的產出已經非常接近，卻提供更多的就業機會、更少的污染。

中國先從幾項產業開始試行改革，二○一二年一月，由上海率先試點。儘管只就小範圍試了一年，但已經有顯著的成效。

不像「二套房屋稅」（針對兩間以上房產），仍只限於上海和重慶。服務業的「營改增」（營業稅改課增值稅），已經快速蔓延到其他城市與鄰近省分，KPMG的會計師沃霍斯預計，今年底就能推展到全國。

長期以來，中國有形商品增值稅的稅收，就佔了四分之一，但是不包含服務業，因此稱做營業稅（business tax），在商品銷售時，就已經強加在售價上了。上游的營業稅轉嫁給下游廠商，因此對處於產業鏈下游的服務業而言，進貨成本已經包含上游的營業稅，等同於稅上加稅。

試行的「營改增」，避開了一隻牛剝兩層皮的重複課稅問題。跟過去一樣，企業針對營業額繳納營業稅，但「營改增」可以主張進貨折抵，扣底已經支付給上游的成本，降低生產鏈中每個環節被強加的稅。

小公司減免四成稅金

中國財政部宣稱，目前為止，「營改增」減少了超過四百億人民幣的稅收，約六十四億美元。小公司受益良多，平均減少四成稅金的繳納。

不幸的是，稅改本身的不完備成了阻礙。自從鄧小平主張改革開放要「摸著石頭過河」，政策制訂者多傾向小規模推動改革，「營改增」的改革也是如此。

但是「營改增」要運作得好，需要將生產鏈中的每個環節都包含進來。中國目前小規模的稅改，只限定在七個服務產業以及幾個城市，在試行範圍外的企業，就不適用「營改增」。

實際上，存在許多的跨界交易，如果是同一個交易合約，包含綜合服務，有些項目是增值稅，有些屬於營業稅，該怎麼辦？

儘管推行有些困難，「營改增」的改革已經開始見效。以前的稅制鼓勵企業盡量在內部完成製造，盡量避開外部交易以降低營業稅。新的稅制則允許更自然的分工，例如鋼鐵廠分拆運輸業務，製藥廠將研發單位獨立出來。

這些好處將鼓勵政府在未來進一步擴大計劃，增值稅的範圍愈大，成效也將更好。（陳竫詒譯）