China's VAT reform crosses the finish line

Under the State Council's mandate, on March 7, 2016, the PRC Ministry of Finance and State Administration of Taxation (SAT) issued the Circular on Comprehensively Launching a Pilot Project for the Levy of Value-added Tax in Place of Business Tax, or Caishui [2016] No.32 (Circular 32). This instructed all SAT branches and provincial tax bureaus across the country to expand the application of value-added tax (VAT) to the remaining industries still subject to business tax (BT), a gross turnover tax that co-existed with VAT as of April 30, 2016.

Pursuant to Circular 32, the SAT will levy VAT on revenue generated by taxpayers from the construction, real estate, banking and financial service sectors, as well as services relating to people's daily life, from May 1, 2016. Subsequent to Circular 32, the Ministry of Finance and/or the SAT issued a series of notices to implement the collection of VAT in place of BT on taxpayers in these remaining industry sectors. This includes the Implementing Measures for the Pilot Project for Levy of Value-added Tax in Place of Business Tax and other documents released under Caishui [2016] No.36 (Circular 36), released on March 23.

How VAT works

VAT first came into existence in 1954, when France was reforming its sales tax system with the intent to eliminate double and sometimes multiple (indirect) taxation due to the many layers of economic activities. The country's introduction of VAT effectively abolished the redundant taxation caused by the previous system, which was a significant obstacle to economic development.

After France's successful implementation, other countries in Europe, Latin America and Asia followed suit. Currently, more than 100 countries have a VAT system of one type or another in place.