Tax breaks aimed at helping service sector

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China will accelerate the reform of its tax system this year to shore up the transition of its economic growth pattern, said Xie Xuren, minister of finance, at a press conference during the National People's Congress (NPC) in Beijing on Monday.

The government will replace sales tax with value-added tax (VAT) for the service sector to unify tax implementation on goods and services and extend the consumption tax to high-energy-consuming products and high-end goods, said Xie.

In addition, it will also extend resources tax as well as property tax to a broader range, while reducing the tax burden on people with low incomes by raising the income tax threshold.

"We will make better use of taxes' role in adjusting the economy and distributing income, to stimulate enterprises' development, guide consumer spending and accelerate the transition of the development pattern," he said.

According to Xie, the government will start this year with a pilot program to impose VAT on some producer services industries - services that support manufacturing - while reducing the sales tax on them at the same time.

"The gradual unification of taxes on goods and services will boost development of the services sector," he said.

The government's goal of developing China's service industries during the 11th Five-Year Plan (2006-2010) failed to achieve all it set out to do within the time frame. Analysts said the sector is crucial to the country's transformation of its economic pattern, and it has huge potential for rapid growth during the next five years.

"VAT is levied only on manufacturing, while services are subject to a business tax that raises a much smaller amount. Given the heavy dependency of local governments on VAT revenue, they have a strong incentive to promote manufacturing, rather than services," said the Asian Development Bank in a report.

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