Assessing effective VAT rates and tax efficiency at industry-level: The case of China

Abstract

In the real-world value-added tax (VAT) rates among industries are often non-uniform. Estimating effective VAT rates (EVATRs) at the industry level can increase understanding VAT burden and tax efficiency in individual industries. EVATRs should be solved endogenously in a general equilibrium framework, so the estimated EVATRs are consistent with the given data of the input-output relationship and industry net VAT revenues. We adopt this new approach to estimate the industry-level EVATRs and assess tax performance under China's multi-tiered VAT rate system on a set of newly released data. The results demonstrate many Chinese industries - in particular, all service industries - pay more VAT taxes than their statutory rates require. The VAT overpayment is mainly driven by unrefunded VAT for inputs by small firms, induced by government policies. We also find China and its industries have higher VAT tax efficiency than most OECD countries, which challenges the conventional preference for a uniform VAT rate regime.