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China Expands Value-Added Tax Trial That May Lower Payments

China will expand a trial tax program to 10 more provinces and cities after seven months of testing in Shanghai, in a move that may reduce payments for non-industrial companies and help support the economy.

The change to a value-added tax from a tax on revenue will be applied starting Aug. 1 to transportation and service businesses in Beijing and Tianjin cities and provinces including Jiangsu, Zhejiang and Guangdong, China’s cabinet said in a statement yesterday. The program will expand later to more areas and industries, the State Council said.

Premier Wen Jiabao this month repeated his call for structural tax changes as the government seeks to stem a six-quarter slowdown in the economy. The shift to a VAT may save Chinese companies 90 billion yuan ($14 billion) in tax payments this year, Zhu Jianfang, an economist with Citic Securities Co. in Beijing, said in a note today.

“China has again turned to counter-cyclical measures in the fields of tax and local investment,” Zhu said. “Fiscal moves have become an important means in stabilizing growth.”

The value-added tax is based on the difference between the price of goods and their cost of production. In Shanghai, the tax was set at 17 percent for leasing services, 11 percent for transportation services and 6 percent for other services including information technology, research and development, according to the city’s tax bureau.

The government is seeking to aid service companies and make China’s economy less reliant on industrial production. The new system may reduce payments by 100 billion yuan a year if taken nationwide and boost GDP growth by 0.5 percentage point a year, Xiao Jie, head of China’s State Administration of Taxation, said in a March article by the official Xinhua News Agency.

Shanghai reported a 13 percent decline in business-tax revenue in the first half to 50 billion yuan after starting the new tax system in January. Value-added-tax revenue rose 51 percent in the same period to 34 billion yuan, according to the city’s statistics bureau.

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