The Turnover Tax System Reform In China's Financial Industry And Countermeasures

China's financial industry turnover is taxed under a business tax system, which has led to a series of problems including double taxation and over taxation:first, business tax is based on the gross transaction value so that deduction of direct costs is not permitted; Second, since business tax is mainly imposed on services while value added tax (VAT) mainly imposed on goods, for taxpayers providing services which should be taxed under a business tax, VAT included in the transaction value cannot be credited. As the VAT rate in China goes as high as 17%, the double taxation incurred this way will give rise to greater tax burden and distortion. Given that VAT is designed to avoid double taxation and is sure to be applied in more industries in China in the next five years, current business tax in financial industry will inevitably be converted to VAT. Moreover, as Shanghai is now trying to construct the international financial centre, reform of financial turnover taxation appears to be more urgent in Shanghai. Compared with London, New York, Singapore and Hong Kong, the financial tax burden in Shanghai is much greater. Given the disadvantages of business tax and its great role in financial taxation, recently it is more important to reduce business tax burden first. Therefore, discussing reform in financial turnover taxation and its effects has great practical significance.The paper is structured as follows:Chapter 1 is a brief introduction of research background, literature review and the basic idea of this paper. In Chapter 2, we will introduce China's financial turnover tax system and its development, including the current business tax and its drawbacks, financial VAT's advantages and possibility of converting financial business tax to VAT in China. In Chapter 3, we will review the theoretical research on financial VAT and relevant international experience to summarize the VAT mode suitable to China. In Chapter 4, impact of financial turnover tax on commercial bank credit in China is deeply studied from both the theoretical and empirical sides, while empirical part is the first innovation of this paper. In Chapter 5, we will measure the tax burden of financial industry before and after the financial turnover taxation reform. In the last chapter, practical difficulties and policy implications of China's introduction of financial VAT will be discussed in detail.The main arguments of this paper include:China's financial industry has full reason and is qualified to adopt VAT. Therefore, China's financial VAT is inevitable. Financial turnover tax has Little impact on China's commercial bank credit, so adjustment in financial turnover taxation will not bring great influences to macro-monetary policy.Among a list of tax reform plans, financial VAT brings biggest reduction in financial tax burden and accordingly biggest loss of tax revenue.Considering international experience and national conditions, recently China's financial turnover taxation can follow EU's "exemption mode", which taxes explicit financial services (input VAT credit permitted), exempts implicit financial services (input VAT credit not permitted) and zero-rates export financial services (input VAT credit permitted). In the long term, China should try to adopt Australia and Singapore's mode, which permits partial input VAT credit in exempt financial services, so as to avoid the negative effects as much as possible. As tax reform can possibly bring about loss of tax revenue, we suggest that reform is carried out first in regions with abundant government revenue like Shanghai.