China's cabinet, led by Premier Li Keqiang, plans to reduce 120 billion yuan (HK$150 billion) of tax payable by firms in the service sector by expanding and deepening a trial of value-added tax (VAT).
The State Council announced yesterday after a meeting chaired by Li that the VAT trial would go nationwide from August 1.
The cabinet, predicting that the new tax regime would save companies a total of 120 billion yuan in tax payments this year, said the reform was aimed at "injecting new vigour into enterprises, creating new growth engines, adding jobs, increasing residents' incomes and bolstering economic growth".
The VAT trial started in Shanghai at the beginning of last year and was then extended to 10 other cities and provinces.
Under the reform, logistics service providers and other service firms, such as those in information technology, are subject to a tax based on the value they add to their finished products instead of a sales tax based on total sales.
Invoiced costs are subtracted from sales and the difference is considered the value added.
The State Council also said yesterday that the reform would be extended to other sectors, including filmmaking and film broadcasting and distribution.
"The decision was in line with expectations and showed the new government's determination to ease tax burdens," said Wang Yao, dean of the department of public finance and taxation at Shanghai Lixin University of Commerce. "More importantly, the government needs to redouble efforts to guarantee tax is reduced," he said.
In Shanghai, the trial proved unsuccessful last year, with about two-thirds of business owners complaining about an increase in their tax liabilities, according to a survey by the China Federation of Logistics and Purchasing.
Many invoices the companies obtained from their suppliers were rejected by the tax authorities as invalid.
The State Council said all authorities were required to fine-tune the reform measures to address problems promptly.
At a news conference in March, Li said his cabinet would focus on action rather than words in deepening China's market-based reforms and streamlining the government.
His remarks were seen as a prelude to a series of economic sweeteners to be introduced by the new national leadership.
The mainland's small and medium-sized firms, most of which are privately owned, are grappling with increasing difficulties amid rising labour and raw materials costs and shrinking external demand.
The government's thinking is that efforts to ease the tax burden on companies and individuals will help stoke domestic demand and boost business activity.
Mainland tax revenue topped 10 trillion yuan last year, up 12.1 per cent from a year earlier.