I, value-added tax
VAT is a kind of turnover tax levied on the basis of value-added generated in the process of circulation of commodities (including taxable services) as the basis for tax calculation. Theoretically, VAT is a turnover tax levied on the value-added or additional value of commodities in many stages of commodity production, circulation and labor services. It is levied out-of-the-money, i.e., at the expense of consumers, and is levied only when there is value-added, but not when there is no value-added. VAT is a kind of tax levied on units and individuals who sell goods or provide processing, repair and fitting services and import goods. VAT has become one of the most important taxes in China, accounting for more than 60% of all taxes in China. VAT is collected by the State Administration of Taxation (SAT), with 50% of the tax revenue coming from the central government and 50% from local governments. Import VAT is collected by the Customs Department and all tax revenue comes from the central government.
II. Scope and Rate
Scope of Taxation: The change of business tax to VAT mainly involves the transportation industry and some modern service industries; transportation includes: land, water, air and pipeline transportation. Modern service industries include: research and development technology services, information technology services, cultural and creative services, logistics auxiliary services, tangible movable property leasing services, and forensic consulting services. Changing the VAT rate of business tax: After the reform, the former business tax was changed to VAT, and two lower rates of 6% (modern service industry) and 11% (transportation industry) were added to the VAT. The change of business tax to VAT mainly covers transportation and some modern service industries. Transportation includes land, water, air and pipeline transportation. Modern service industries include: research and development and technology services, information technology services, cultural and creative services, logistics support services, tangible movable property leasing services, and forensic consulting services.
The VAT is levied on the final consumer, thus inhibiting the growth of domestic demand and hence the long-term equilibrium income of the economy, increasing the tax burden on individuals, crowding out consumption and investment, and increasing the portion of GDP in which government purchases take up a disproportionately large share, to the detriment of economic performance.