PEOPLE'S Republic of China is working on a proposal to replace business taxes with value added tax (VAT) as a part of slew of fiscal reforms discussed by Chinese Government with International Monetary Fund.

This is disclosed in the IMF Country report on China prepared by IMF Staff that incorporates the views of Chinese authorities and a IMF release issued on 17 th July after conclusion of the 2013 Article IV consultation with China. Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year, resulting in preparation of a report on each country.

The Report, however, does not indicate any timeframe for roll-out of VAT.

Suggesting specific tax reforms, IMF staff report says: “These include replacing the specific business taxes with the VAT, which will help broaden the tax base, minimize cascading, and reduce evasion. At the same time, expanding the property tax pilot will help contain speculation in the real estate sector and boost local government revenues (the pilot covers Chongqing and Shanghai and has a narrow base - for example, in Shanghai existing homeowners were grandfathered and in a sample of new purchases about 20 percent were subject to the property tax).”

Chinese authorities are committed to ensuring medium-term fiscal sustainability, and they agreed with IMF staff on the importance of strengthening the fiscal framework to better manage local government finances.

The authorities favor allowing limited, transparent, and well-regulated local government borrowing, and consider development of a municipal bond market as part of the solution to the challenges facing local governments.

The Report says: “They agreed with the benefits of lowering social contributions, but were concerned about the cost and financial implications for the social security system. They would consider the possibility as part of a comprehensive social security reform. They were committed to continuing tax reforms, especially replacing the specific business tax with the VAT. They were also considering other taxes that could be well-suited to collection and control by local governments, including broadening the pilot property tax program.”

IMF's Board of Executive Directors encouraged China's continued efforts to strengthen the governance and transparency of local government finances while protecting priority spending.

IMF release says: “In addition, shifting the tax burden from social contributions toward more progressive and efficient forms of taxation, including a value added tax, would boost the role of private consumption as a growth-driver and reduce income inequality. Directors welcomed the authorities' indication to consider this as part of a comprehensive reform of the social security system.”

According to the Report, China's 12th Five Year Economic Plan also promotes environmentally-friendly growth, as three out of seven priority industries are aimed at cleaner and more sustainable growth. It also calls for advancement of environmental protection tax reform and improvement in waste disposal fees.

It says: “Resource tax reforms have been piloted in some regions since 2010 and, in 2011; taxes on crude oil and natural gas were raised (and converted to an ad-valorem basis). A comprehensive environmental protection tax plan has been submitted to the State Council this year, which covers water, solid waste, emissions, and noise. Price signals could be better used to promote the efficient allocation of resources and, more broadly, achieving the desired domestic rebalancing would help reduce the strain on the environment by shifting activity away from manufacturing to the less resource intensive and less polluting service sector.”