China’s VAT reform is likely to further strengthen the country’s position in the world economy. The Chinese market will become more familiar for global entities and attract investors who were previously discouraged by inefficiencies in the system.
Part of the Chinese government’s 12th Five-Year Plan - the move to replace the dual system of indirect taxes and business tax with VAT - will reduce the tax burden on companies, and promote the development of the manufacturing and services sector by encouraging firms to outsource parts of their business.
This program has continually expanded on the VAT trial, which started early 2012 with the transportation and modern services industries in Shanghai. Completion is estimated for the first half of 2016. Traditional service providers may find it challenging to understand the impact and implications of the reform. The next step for the Chinese government would be to simplify rules for non-resident businesses to operate in China, as this would encourage foreign business to enter the market.
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