The effects of China’ s VAT enlargement reform on the income redistribution of urban households

Li Du

doi:10.1186/s40589-015-0024-5

Abstract

China’s former goods and service tax (GST) system subjects sale of goods to VAT and provision of services to business tax. The VAT enlargement reform launched in 2012 aimed to replace the business tax with VAT step by step. This paper is intended to explore the redistribution effects of this reform. On basis of input-output model and statutory tax rates, this paper derives the measurement of full GST burden of households in China where both VAT and business tax are imposed. Using the 2012 urban household survey data, the redistribution effects of the VAT enlargement reform is estimated by comparing the Gini coefficient and general entropy indexes before and after the reform. The VAT enlargement reform has improved the redistribution effects of China’s GST system mainly through lowering the average tax burden and reducing the inequality within the lowest-income group, though the inequality among different income groups was not reduced considerably. Compared with overall rate reduction, greater relief to necessity items could improve the redistribution effects of the future VAT system more effectively.

Highlights

China’s former goods and service tax (GST) system subjects sale of goods to value-added tax (VAT) and provision of services to business tax
It is planned that the switch from the current dual goods and service tax system, which levies VAT and business tax concurrently on sale of goods or provision of services, to a single GST system with only VAT levied will be finished by the end of 2015
The direct effective tax rates and total effective tax rates We divide all the 149 industries into three categories, namely the industry which is subject to VAT both before and after the VAT enlargement reform (VAT industry), the industry which is subject to business tax both before and after the VAT enlargement reform (BT industry), and the industry which is subject to business tax before the reform and VAT after the reform (Trial industry)

Summary

Introduction

China’s former goods and service tax (GST) system subjects sale of goods to VAT and provision of services to business tax. China launched the pilot value-added tax (VAT) enlargement reform in Shanghai with the new rules taking effect in January 1, 2012, in transportation and some selected modern service industries and quickly expanded to other regions and industries. It is planned that the switch from the current dual goods and service tax system, which levies VAT and business tax concurrently on sale of goods or provision of services, to a single GST system with only VAT levied will be finished by the end of 2015. Sale of goods is subject to VAT and provision of services is subject to business tax before the VAT enlargement reform. In 2013, the revenue from domestic VAT and business tax accounted for 26 and 16 % of China’s overall tax revenue, respectively, which ranked No 1 and No 3

Methods

Results

Conclusion