China's VAT Reform, Local Governments, and FIEs

China initiated the Value-Added Tax (VAT) reform on May 1, 2016, which replaced Business Tax (BT) with VAT in an effort to reduce the burden of taxpayers and benefit enterprises and industries. China primarily levied VAT on the goods sector and BT on the service sector. With the VAT system, the purchase tax is fully deducted, while its rate is set by sales with the BT system. Accordingly, industries, especially the service sector, welcome the reform, in that the VAT is replaced with BT in associated sectors and decreases tax rates.The growth of the service sector can help to improve unemployment. China seems to be stepping up efforts to solve overproduction and making full use of measures such as company liquidation and bankruptcy. However, this is also leading to mass layoffs. China needs to expand its service sector in order to reduce unemployment. The Chinese government may look forward to a positive impact on its economy through expansion of the VAT reform to new sectors.Chinese political parties may also welcome the VAT reform. Although the VAT reform was nationally launched on May 1, 2016, it had started from 2012 as a trial program under Hu’s leadership, the former Chinese president. Throughout Hu Jintao and Xi Jinping’s regimes, it took four and half years to complete the tax reform plans. Two regimes may be proud to have been consistent in carrying out the tax policies in their regimes. Moreover, the growth of the service sector, the current regime’s focus, has a significant role in ‘the changes of economic growth pattern’ emphasized by the former regime.This article explores the potential effects of the VAT in China, and describes implications for policy in Korea