The central government will determine a reasonable share of revenue for local governments from the value-added tax, which will replace the business tax nationwide next month, Premier Li Keqiang said on Monday.
Li was speaking to heads of government of 20 provinces, municipalities and autonomous regions at a meeting while soliciting opinions on how to divide the expanded VAT.
The expansion of the VAT will encourage businesses to invest effectively in equipment and technological upgrading, the premier said, because the tax is levied on the difference between revenue and cost.
Li said local governments cannot unreasonably intervene with corporate operations and obstruct enterprises’ cross-regional activities to collect more tax revenue.
Local governments now get about 40 percent of their revenue from a tax levied on businesses’ income, according to the State Administration of Taxation. Beginning on May 1, it will be replaced by the VAT in all sectors as part of national tax reform.
The new VAT will cut local governments’ revenue if the proportion is not changed. The 20 provincial-level regions reported an estimated tax reduction this year of 1.7 billion yuan ($263 million) to 13 billion yuan.
Currently, the central government gets 75 percent of the VAT revenue and local governments collect 25 percent. That proportion is expected to be adjusted to 50-50 in the new VAT, media have reported.
Local governments would likely get double their current share to compensate for the income reduction caused by the tax replacement, experts said.
At the meeting, governors from western China provinces such as Qinghai, Gansu and Guizhou called for more funds from the central government to go to less-developed areas in the central and western part of the country.
Losang Jamcan, chairman of the Tibet autonomous region, said the VAT will bring 1.7 billion yuan less in tax for local governments, accounting for 9 percent of total taxation.
“I hope the central government will continue the favorable policy to leave all taxes for the use of Tibet to support our social and economic development,” the chairman said.
