BEIJING — China is set to boost its value-added tax (VAT) credit refunds in the country's latest tax and fee reduction efforts to ease the burden on businesses and shore up the vitality of market entities.

The country's total VAT credit refunds will reach approximately 1.5 trillion yuan (about $235 billion) this year, with priority to be given to micro and small firms and the manufacturing industry, Vice Minister of Finance Xu Hongcai told a press conference earlier this week.

"The large-scale tax refunds are the most important part of this year's new package of tax-and-fee policies," said Xu, citing the country's record tax cut and rebate target of 2.5 trillion yuan.

"[Tax refunds] are a direct boost to the cash flow of enterprises, and will benefit them more quickly than tax cuts," said Premier Li Keqiang while presiding over an executive meeting of the State Council on March 21.

Newly added VAT credits will be refunded in full on a monthly basis starting from April 1, while outstanding VAT refunds to micro and small businesses will be completed in one lump sum by the end of June, said a circular jointly issued by the Ministry of Finance (MOF) and the State Taxation Administration.

"These moves will help steady the operation of small and micro firms and promote enterprises in key industries to expand investment and improve production techniques, thus accelerating the high-quality development of the manufacturing sector," said Liu Yi, a professor at Peking University.

The rebate of outstanding VAT credits is a particular highlight, which will fully inject vitality into enterprises, Liu added.

To reconcile the implementation of the preferential tax policies and pressure on local governments, China has rolled out a slew of measures to increase and front-load transfer payments.

In 2022, central government transfer payments to local governments will increase by 18 percent from last year to reach nearly 9.8 trillion yuan, said Xu.

The first batch of transfer payments to support excess tax paid rebates to micro and small businesses, worth 400 billion yuan, had been released on March 21, according to the MOF.

The VAT a firm must pay is its output tax minus the input tax. When the taxpayer's output tax is insufficient to cover its input tax, the difference between the two is called excess tax paid.

A firm can use the excess to offset taxes in the next taxable period, or apply for refunds in the current period.

In recent years, China has been improving the refund system of excess VAT paid to ease the burden on corporate cash flow. In 2016, the country implemented a comprehensive reform in replacing the business tax, a mainstay of local tax revenues, with VAT, and stepped up the reform in 2019 with an improved refund sharing mechanism.

From 2019 to 2021, tax authorities handled a total of 1.23 trillion yuan in excess tax refunds, which played a positive role in shoring up the real economy including the manufacturing industry.

"Excess tax refunds can directly offer cash flow support for enterprises, spur the upgrading of their equipment and expand investment in technology," said Li Xuhong, a senior researcher with the Beijing National Accounting Institute.

The large scale of excess VAT refunding and the improved procedures of tax collection, payment and refunding this year will help refine the country's VAT system, Li said.