The expansion of the business tax (BT) to a value-added tax (VAT) has broad impact. On May 1, the pilot BT-to-VAT reform expanded to all industries, construction, real estate, financial and consumer service industries included, and the purchase and rental of real estate became deductible, benefitting all industries.

Shift from BT to VAT leads to tax cut. As of end-2015, the pilot reform led to a cumulative tax cut of Rmb641bn, shared by the pilot companies and the original VAT payers. As the tax can be passed on, the tax cut for the corporate sector will also benefit households.

Small companies enjoy a greater reduction in the tax rate. The VAT rate for small companies is 42% less than the previous BT rate. However, buyers of goods and services from small companies cannot receive or can only receive a small tax deduction, possibly hurting the competiveness of small companies.

Impacts on the new pilot industries are as follows:

Tax burden on the real estate industry to decline. Selling or renting real estate is subject to an 11% VAT, exceeding the previous 5% BT, but real estate companies can receive a large deduction, as the upstream construction industry also shifts from BT to VAT and land cost is deductible.

Tax burden on construction industry may rise. Construction services are subject to an 11% VAT, exceeding the previous 3% BT; many materials that construction companies purchase from small companies or farmers are not fully deductible.

Tax burden on financial industry remains largely stable. Financial services are subject to a 6% VAT, slightly higher than the previous 5% BT. Real estate rentals, IT equipment and office supplies costs are deductible.

Tax burden on the consumer service industry to fall. Numerous small-scale taxpayers in the consumer service industry will enjoy a tax cut. General taxpayers face a slightly higher tax rate, but they can deduct rent and other inputs.

After all industries shift from BT to VAT, still room for VAT reform. The pilot BT-to-VAT reform has a transition period of 2~3 years. The multiple tiers of VAT rates still need to be simplified and the problem of double taxation remains under the simple-taxation methods. The portion of local-government fiscal revenue will fall after all industries shift to the VAT. The fiscal relations between the central and local governments need rationalization.