The State Council of China on Wednesday approved a pilot program to replace turnover tax with a value-added tax (VAT).

The government will replace turnover tax with a VAT on select service sectors, such as the transport sector, in Shanghai from Jan 1, 2012, said a statement issued after a State Council meeting presided over by Premier Wen Jiabao.

If the pilot program is successful and the conditions are right, the policy will be extended to some service businesses nationwide, it said.

The reform aims to incrementally replace turnover tax with a VAT in all sectors nationwide, it said.

Turnover tax refers to a tax on the gross revenue of a business, while a VAT refers to a tax levied on the difference between a commodity's price before taxes and its cost of production.

The policy change is considered a taxation reduction, especially for the service sector.

Current VAT rates include two ranks, 17 percent and 13 percent. According to the statement, the government will also add two lower ranks, 11 percent and 6 percent.

From: China Daily