The reform to replace the Business Tax (BT) with the VAT is the largest tax reform initiative in China since 1994. This article assesses the first two years of the reform from a tax policy perspective. It shows that the government has tried to preempt resistance to reform through highly unusual tax design and by allowing local governments to retain revenue from pilot sectors. The VAT for pilot sectors is characterized by two new reduced rates that apply to a wide range of business-to-business transactions as well as consumer services (such as internet and mobile data services) not generally regarded in other VAT systems as requiring reduced rates. Moreover, a broad population of new VAT taxpayers is subject to \u22simplified collection\u22 — a low-rate cascading levy. One characterization is that a second VAT has emerged that perpetuate many of the BT’s distortionary characteristics while also taking on the flaws of China’s traditional VAT. This renders both the prospects and benefits of extending the reform to further sectors (most consumer services, real estate, and financial services) uncertain
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