Macro effects of the B2V reform

This section focuses on the impacts on the industrial structure in China, and the distribution of VAT revenue between the Central Government and the local governments.

(a) Impact on the industrial structure

In the world's major developed countries (for example, the United States, the United Kingdom), the contribution rate of the service industry to economic growth is generally 70 per cent.33 According to the data from the National Bureau of Statistics of China,34 the contribution rates of the three major industries in China are shown in Table 5.1.

Table 5.1 The contribution rates of three major industries (unit: per cent)

Item 2011 2012 2012 2014

The first industry35 4.2 5.3 4.4 4.7

The second industry36 51.5 49.3 48 46.3

The third industry37 44.3 45.4 47.6 48.9

33 _{Liao and Pan, above n 16, at 163.} 34

See the National Bureau of Statistics of China "National Data" National Bureau of Statistics of China <http://data.stats.gov.cn/easyquery.htm?cn=C01&zb=A0209&sj=2014> (accessed 25 August 2015).

35 _{In China the first industry mainly includes agriculture and forestry.} 36 _{In China the secondary industry mainly includes manufacturing.} 37

124 From the table, it can be seen that the contribution rate of the third industry (the service industry) was 44.3 per cent in 2011 before the B2V reform. In 2012 this contribution rate increased to 45.4 per cent. Due to the fact that the reform was implemented only in the pilot cities, the increment of the contribution rate of the service industry is only 1.1 per cent in 2012. However, when analysing the contribution rate from the pilot cities, the effect is clearer. For example, for the first half year after the B2V reform, the Gross Domestic Product (GDP) in Shanghai was 995 billion Yuan,38 which increased by 7.2 per cent when compared with the corresponding period of 2011.39 The first industry decreased by 3.2 per cent, the second industry increased by three per cent, and the third industry increased by 10.3 per cent.40 This means that the B2V reform could positively affect the industrial structure. When the B2V reform was extended to all of China in 2013, the contribution rate of the third industry was 48.9 per cent, which increased by 3.3 per cent compared with 44.3 per cent in 2011. As more industries were included in the B2V reform, the contribution rate of the third industry saw an upward trend, which is evidenced by the contribution rate of the third industry in 2014 (48.9 per cent).

38 _{The exchange rate between Yuan and New Zealand dollar is RMB439.72 = NZ$100.00.}

Therefore, RMB 995 billion = NZ$226.28 billion. See Bank of China, "BOC Exchange Rate" (12 February 2016) Bank of China <http://www.boc.cn/sourcedb/whpj/>.

39 _{胡怡建, "上海服务业'营改增'改革试点效应分析" (2013) 1 科学发展 55, at 61}

(translation: Hu, Yijian, " Shanghai services business change increases the pilot reform effect analysis" (2013) 1 Scientific Development 55, at 61).

40

125 (b) Impact on the distribution of tax revenue

Before the B2V reform, according to the Law of the People's Republic of China on the Administration of Tax Collection,41 the local taxation bureaus which report to the local governments are in charge of the collection of the BT. Meanwhile, the state taxation bureaus report to the SAT, which is in charge of collecting the VAT.42 In regard to the distribution of the revenues of the VAT and the BT, the following revenues are allocated to the Central Government:43

(1) the VAT collected from imported goods by China's General Administration of Customs;

(2) 75 per cent of the whole VAT revenue excluding the VAT collected by China's General Administration of Customs; and

(3) the BT collected from railway transportation, the headquarters of banks and insurance companies.

In contrast, the following revenues are allocated to the local governments:44

(1) 25 per cent of the whole VAT revenue excluding the VAT collected by China's General Administration of Customs; and

(2) the whole BT revenue, except revenues collected from the railway transportation, the headquarters of banks and insurance companies.

41 _{Law of the People's Republic of China on the Administration of Tax Collection (31 August}

2005) The Central People's Government of the People's Republic of China <http://www.gov.cn/banshi/2005-08/31/content_146791.htm>.

42 _{The Chinese Institute of Certified Public Accountants, Taxation Laws (Economic Science}

Press, Beijing, 2014), at 24.

43 _{Ibid, at 24-25.} 44

126 According to a report from the Ministry of Finance, Table 5.2 illustrates the amount of fiscal revenue generated by the different types of taxes before the B2V reform:

Table 5.2 The fiscal revenue of 2011 (unit: billion)45

Item Amount (Yuan) Amount (NZ$)46 Per cent VAT (domestic) 2,426.664 551.866 27.00%

Enterprises Income Tax 1,676.035 381.160 18.68%

Business Tax 1,367.861 311.075 15.25%

VAT and Excise Tax of imported goods 1,356.026 308.384 15.11%

Excise Tax (domestic) 695.593 158.190 7.75%

Individual Income Tax 605.409 137.681 6.75%

Contract Tax 276.361 62.849 3.08%

Custom Duty 255.91 58.198 2.85%

Land Appreciation Tax 206.251 46.905 2.29%

Vehicle Purchase Tax 204.445 46.494 2.27%

Tax on the Use of Urban Land 122.226 27.796 1.36%

Building Tax 110.236 25.070 1.23%

VAT refund of exported goods -902.47 -205.237 -10.05%

Total fiscal revenue 8,972.031 2,040.396 100.00%

45

Not all the items are listed here. See the Ministry of Finance of People's Republic of China, "An analysis of the fiscal revenue of 2011" (February 2012) Ministry of Finance <http://szs.mof.gov.cn/zhengwuxinxi/gongzuodongtai/201202/t20120214_628012.html>.

46 _{The exchange rate between Yuan and New Zealand dollar is RMB439.72 = NZ$100. See}

Bank of China, "BOC Exchange Rate" (12 February 2016) Bank of China <http://www.boc.cn/sourcedb/whpj/>.

127 From the data in Table 5.2, it can be seen that the revenue generated from the VAT accounted for 27 per cent of the entire fiscal revenue, and the BT accounted for 15.25 per cent.47

According to the distribution rules mentioned above, when completing the B2V reform, the abolition of the BT will have a huge impact on local government. This can be illustrated by the following example. In 2012,48 the national VAT income was about 2.6 trillion Yuan49and the BT income was about 1.5 trillion Yuan.50 Therefore, before the B2V reform, the tax revenue of local governments was 2.15 trillion Yuan.51 After the B2V reform, the tax revenue of local governments was 1.025 trillion Yuan.52 The gap is 1.125 trillion Yuan,53 which means that the local governments will lose 1.125 trillion Yuan in fiscal revenue if the Central Government does not change the distribution rules. The scheme of the pilot programme stipulates that the revenue collected from enterprises that were previously subject to the BT is still to be allocated to

47 _{See the Ministry of Finance of People's Republic of China, above n 45.} 48

Liao and Pan, above n 33, at 166.

49 _{RMB2.6 trillion = NZ$0.59 trillion. See Bank of China, "BOC Exchange Rate" (12 February}

2016) Bank of China <http://www.boc.cn/sourcedb/whpj/>.

50 _{RMB1.5 trillion = NZ$0.34 trillion. See Bank of China, "BOC Exchange Rate" (12 February}

2016) Bank of China <http://www.boc.cn/sourcedb/whpj/>.

51

RMB2.15 trillion (= 2.6 × 25% + 1.5) = NZ$0.48 trillion. See Bank of China, "BOC Exchange Rate" (12 February 2016) Bank of China <http://www.boc.cn/sourcedb/whpj/>.

52 _{RMB1.025 trillion (= (2.6 + 1.5) × 25%) = NZ$0.23 trillion. See Bank of China, "BOC}

Exchange Rate" (12 February 2016) Bank of China <http://www.boc.cn/sourcedb/whpj/>.

53 _{RMB1.125 trillion (= 2.15 – 1.025) = NZ$0.25 trillion. See Bank of China, "BOC Exchange}

128 local governments during the pilot programme of the B2V reform.54 However, this is effectively only a stalling tactic. It is still unclear how the Central Government will address the problem of the local governments losing tax revenue.