Trial operation of changing business tax to VAT at some sectors in Shanghai is an import step to improve China’s VAT reform system.
Due to long processing chain, tax burden is heavy for non- ferrous producers. Although the existing tax policy will guarantee tax income at central and local governments, the high tax burden will weigh on enterprises. In this context, changing business tax into VAT will be in line with government call to encourage exports of deep-processed products.
As labor costs rose sharply in 2011, enterprises are losing competitiveness gained from previous low labor costs, while the tax reform will reduce tax burden at enterprises and will allow enterprises to have new competitiveness.
The reform is only on trial operation in Shanghai, and there is still a long way before the reform to be fully implemented in other regions, particularly in regions with rich nonferrous resources. If processing chain fails to be deepen further, changing business tax into VAT may reduce tax income at local governments, which will be obstacle for fully implementation of the reform.