Starting on May 1, 2016, China began replacing the business tax with a value-added tax (VAT) across all industries, after the policy was extended to the construction, real estate, finance and consumer services sectors, a historic move to show the world China’s model of taxation reform.

In January 2012, the country first started testing VAT reform in transportation and modern service areas in Shanghai; from Aug 1 to the end of 2012, the policy reform was expanded to 11 provincial regions including Beijing; starting on Aug 1, 2013, the reform in the two fields was expanded nationwide; on Jan 1, 2014, rail transport and postal industries were included, and on June 1, the telecom industry was also covered.

Then on July 1, 2017, China’s VAT rate structure was cut from four to three tiers, canceling the rate 13 percent.

From some regions and industries to all industries nationwide, VAT was gradually extended to goods and services, building a complete information-based value-added tax system.

In the last five years, the reform has saved 1.7 trillion yuan ($258 billion) for individuals and enterprises. VAT reform has covered 16 million enterprises and 10 million individual taxpayers, with more than 2 trillion yuan in business taxes converted to VAT, according to Xiao Jie, minister of finance.

Data from the fiscal and taxation department also showed that in the first seven months this year, VAT from the construction, real estate, finance and consumer services sectors was 756.8 billion yuan, down 140.4 billion yuan compared with the business tax.

VAT reform is not just a move to reduce taxes. Zhu Qing, a professor at Renmin University, said the reform is a measure to boost supply-side structural reform, and will exert positive effects on mass innovation and entrepreneurship.

Shanghai, the earliest to test the reform, has seen its industry structure upgraded. From 2011 to 2016, the ratio of primary and secondary industries saw a huge decrease, while the tertiary industry continued to grow.

Industry insiders said that the country will solve problems found in the VAT reform to improve its taxation management and international competitiveness.

Measures to improve the VAT deduction chain and levy management, and crack down on tax fraud will also be taken to improve the business environment and create new driving engines.

Vitor Gaspar, director of the IMF Fiscal Affairs Department, said the progress seen so far in China in tax reforms definitely promotes its fiscal and taxation system reform, and will advance progress in the modernization of the country’s management ability.