The choice of China's Business Tax to Value Added Tax reform: the traditional VAT model or the modern GST model?

摘要

By implementing the Pilot Program for the Collection of Value Added Tax instead of Business Tax, China has started a move to a Value Added Tax (VAT). There were two models of VAT/Goods and Services Tax (GST) available to policymakers: the traditional VAT model and the modern GST model. VATs adopted in the European Union are the typical examples of using the traditional VAT model, whereas the GST system introduced in 1986 in New Zealand is regarded as the leading example of the modern GST model.This research aims to determine which model China should use going forward to develop further its VAT regime, and provide recommendations for future reforms. First, the thesis introduces the theory and history of VAT, and discusses Adam Smith's four principles of taxation, which are equity, certainty, convenience, and efficiency, along with the principles of simplicity and neutrality. These principles are crucial due to the fact that they are the standard criteria used to evaluate a tax regime. In addition to these principles, debates over the tax base (wide or narrow), tax rate (single or multiple), and the registration threshold (high or low), are also discussed.Second, this research examines three VAT/GST systems, namely, China's VAT system, the European Union's VAT system, and New Zealand's GST system, in terms of the tax base, tax rate structure, and the registration approach.Finally, the results of this research show that China chose the traditional VAT model to develop its new VAT regime. By conducting research on the modern GST model, it is suggested that the single tax rate structure and a broad tax base are the essential requirements for an ideal VAT/GST system. In the light of the status quo, the culture of Chinese society may not suit the modern GST system as used in New Zealand because the tax collection and administration level is not at a high standard in China. On the basis that the researcher believes the modern GST model is the best model for China, policymakers in China could develop its VAT by gradually moving towards the modern GST model.All the laws and exchange rates used in this thesis are as at 12 February 2016.