Local Government Tax Share to be Increased to Make Up for Loss of Business Tax

Local Government Tax Share to be Increased to Make Up for Loos of Business TaxReports on local government share of the value added tax revenues will be increased from 25 percent to 50 percent, but still it does not make up for the disappearance of the business tax in China. Beijing will use other sources of revenue that will compensate local authorities. A financial expert said that the increase is likely to be introduced and the central and local governments proportion of VAT, the largest tax in China will be adjust 50/50 from 75/25 a ratio that is based on a document that is drawn by the ministry with internally sought opinions.

The change is expected to win local governments support in imposing an ambitious VAT reform starting May1 were it will be expanded to construction, finance, property and consumer service sectors. Launched as a pilot program in 2012, the reform was to eliminate repeated taxation and ease corporate burdens. Once the reform is implemented fully, business tax which was the biggest tax source for local governments will be ceased and will create huge losses for the local government. Te lead to arguments that local government share of the new VAT should be increased to make up the deficit.

A tax expert said that is the proportion is 50.50 in effect it would be a reversion to the central and local ratio before any reform in the VAT. He also said that several regions rely on business tax than other tax and the 50/50 approach is unfair to these regions that are rich in business tax since they will occur heavy losses and by increased tax refunds might help in compensating these regions. But other analysts argue that the central government share should be greater since it might encourage local governments to compete for investments.

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