"Fiscal revenue will drop for sure, but the tax savings for companies can be used for equipment upgrading, thus propelling research and development," Jia added.

Driving economic development

"VAT reform indicates that companies may have more funds to expand investment, which is also a source of domestic demand," said Zhang Peisen, a researcher at the State Administration of Taxation, in an interview with Xinhua News Agency.

In order to cushion the blow incurred by the worsening world economy and to prevent a plunge or major fluctuations in economic growth, China's decision makers are now pushing forward forceful measures to boost domestic consumption in addition to stabilizing exports. Apart from a 4-trillion-yuan ($586 billion) investment package over the next two years, the government plans to cut taxes by 300 billion yuan ($44 billion) to provide some relief to companies and individuals. In 2007, China's fiscal revenue exceeded 5 trillion yuan ($733 billion), laying a solid foundation for VAT reform, as the government has abundant money even though the new tax policy will lower its coffers by 100 billion yuan, Zhang said.

Li Gang, an analyst at China Securities Co. Ltd., told Beijing Review that VAT reform not only would reduce companies' spending but also increase their profits. He expects the tax burden on enterprises reduced by the VAT reform to account for 7.81-15.32 percent of the total value of their fixed assets investment, thereby adding 6-8 percent to their annual profits.

Li said after the VAT reform program takes effect, companies could greatly reduce their expenses on costs so that they could improve their cash flows and have more money to upgrade their equipment-a means of enhancing their competitiveness.

Because the U.S. subprime mortgage-sparked global financial crisis is posing daunting challenges to China's real economy, Li believes now is the best time to carry out VAT reform to boost domestic companies' comparative advantages in international market competition and fortify their abilities to fight risks.

"I strongly believe the reform will exert positive influences on the steady, fast and sound development of the Chinese economy," Li said.

He added that the reform could help small and medium-sized enterprises (SMEs) to overcome financing difficulties. The new VAT rule will reduce the tax rate for small taxpayers, including many SMEs. In addition, the Ministry of Finance and the State Taxation Administration might further encourage SME development by raising the thresholds of both the VAT and sales taxes.

Effective or not?

Liu Shangxi, Deputy Director of the Fiscal Science Research Institute under the Ministry of Finance, is optimistic about the VAT reform, but is uncertain about the goal to be obtained in boosting the country's economic development. He said that after four years of experiment in the country's northeast and central regions, the government has accumulated rich experiences. The timing of the reform's introduction nationwide is right, and it will not encounter major obstacles at present, he added. But it is still uncertain whether the objectives of the tax reduction can be achieved, he said.

Liu said the reform would not affect the previous plans of well-performing businesses. As for loss-making companies, survival would be their priority, and most do not have a budget to purchase more equipment, so that VAT reform would not affect their business plans either.

But companies that breakeven and have a bright development outlook might be able to increase their investment in equipment after the new VAT rules are adopted next year, Liu said.

But he added that it would not be easy to spur investment through the single effort of VAT reform alone, because many problems could emerge in the VAT deduction practice. Local governments must approve tax deduction amounts, which have a direct bearing on their own revenue. They could prolong the process of implementing the reform with complicated procedures, he said.

When the northeastern region conducted its VAT reform pilot program, the State Taxation Administration had estimated that the new scheme could reduce the tax burden of the pilot companies by 10 billion yuan ($1.47 billion) annually. But in 2005, only 4 billion yuan ($586 million) of tax was exempt; and 5 billion yuan ($733 million) was exempt in 2006-amounts far less than the estimated 10 billion yuan.

Liu pointed to two other factors that could impede the effective implementation of the reform. On the one hand, the procedures for the tax exemption of fixed assets are complicated and time-consuming; and on the other, local officials do not want to see large revenue reductions in their coffers.

Liu said he would take a wait-and-see attitude on whether the VAT reform could reduce corporate tax burdens on a large scale and boost economic development.