Research On China’s Value Added Tax Law System On Banking Sector

As the core of the modern financial system, the banking sector plays importantrole to promote and facilitate the development of China’s national economy andforeign economic and trade exchanges. Our government should pay efforts to create afavorable external environment for the sound operation of the banking sector,especially tax law environment. But there are serious defects, such as serious doubletaxation, unreasonable basis of tax assessment and unfair tax rates, in the legal systemof China’s current business tax levied on the banking sector. And the indirect taxburden of China’s banking sector resulting from it is much heavier compared to otherdomestic sectors and foreign counterparts, which is not conducive to the developmentof China’s banking industry. Value Added Tax (hereinafter referred to as “VAT”) legalsystem has a lot of superiority, including the ability to overcome a lot of doubletaxation factors, tax neutrality and the potential to bring stable and sufficient sourcesof revenue. Countries in the world have been generally adopted VAT (or goods andservices tax, hereinafter referred to as “GST”) levied on the banking sector, and ouroverall direction to solve the above problems is to transfer to VAT from the businesstax levied on the banking sector. Therefore, the research on VAT legal system forChina’s banking sector has important theoretical and practical significance.In China, the research on the indirect tax law system reform for banking sectorhas experienced from the internal reform program of the business tax including thereduction of the business tax rate and the adjustment of the tax basis of business tax,to the suggestions and policies of covering all the industries providing goods and services, including the banking sector, to the range of collection of VAT. In recentyears, most of the scholars have fully discussed the necessity and feasibility of thechange from “business tax” to “VAT” levied on the banking sector, and put forwardtheir own views and suggestions for the design of the VAT legal system after thechange. Many foreign experts and scholars still hold a controversy on whether VATshould be levied on banking sector and other financial and insurance institutions.They separately pointed out the necessity of the introduction of VAT on the financialsector and the technical and regulatory difficulties involved, and they have conductedin-depth discussion and comparison about how to define the scope of tax exemptionof financial services and how to choose the input tax deduction approach.This article is based on the drawbacks of China’s business tax legal system forbanking sector, including the comparatively serious double taxation, the unreasonabletax basis and the unfair rate of business tax etc., elaborate the necessity and feasibilityof the change process of VAT levied on banking sector, objectively analyze thedifficulties and obstacles it may face in the VAT change on banking sector, such as thetax system design difficulties and the central and local fiscal system obstacles,compare and learn from the advanced experience of VAT legal system of theEuropean Union, Australia and New Zealand etc. levied on banking sector, and try tobuild a practical VAT legal system on banking sector combined with China’s specificnational conditions.The innovation of this paper is to: Firstly, the paper make a theoretical analysison the necessity to levy VAT on the banking sector from the economics and tax lawperspectives, elaborating the significance to levy VAT on banking sector from gametheory, the tax system optimization theory, the theory of tax neutrality, the principle oftax fairness and the principle of tax efficiency. Secondly, the paper preliminarily buildthe VAT legal system for China’s banking sector from four aspects, includingclarifying the tax collection approach, the tax basis, the tax rate and improving thesupporting system etc., hoping to provide a useful reference for China’s VATlegislation. Thirdly, the paper conduct a detailed examination of the relevantprovisions and problems existing in China’s business tax on banking sector, with theintegrated use of the literature study method, the diagrams illustration method, theempirical study method and the comparison analysis research methods etc., makecomparative analysis of the advantages and drawbacks of the basic tax-free approach,the tax-free approach allowing input tax deduction and zero tax rate approach, and make the reference the relevant advanced experience combining with China’s specificconditions.