The tax reform that will replace the business tax with a value-added tax starts from next month. But how does the VAT work and who is subject to the new tax?

Taking the hotel industry as an example. For a hotel with an annual turnover of 10 million yuan, the VAT will be levied at the standard rate of 6 percent. In this case, the taxable turnover would be 9.434 million yuan, and the VAT would be 566-thousand yuan. But that is not the final tax bill that the hotel has to pay. During the tax period, the hotel purchased food and beverages for 1 million yuan and paid a VAT of 145-thousand yuan for that. The final tax bill for VAT would then instead be 421-thousand yuan.

But, who should register for VAT?

According to the pilot program, any person or company that does business in the construction, real estate, services or finance sectors should register for VAT. The VAT rate varies by sector.

Analysts say the VAT tax system is common in other countries. They say that adopting the VAT will reduce the tax burden on business operators and also simplify the tax declaration process.