Does value-added tax reform in services accelerate enterprise upgrading? Micro evidence from China

ABSTRACT

This study investigates the impact of the value-added tax reform in services on enterprise upgrading during China’s transition. We found that the reform significantly accelerates the process of enterprise upgrading by using data on China’s listed companies from 2009 to 2017 and a difference-in-differences approach. Heterogeneous analyses show that the impact of the reform is mainly manifested in non-state-owned enterprises. We also find that quality upgrading (value-added) plays a dominant role, while the potential of total factor productivity is not fully exploited yet. Tax reduction, investment in innovation, specialization, and factor allocation are major pathways to achieving enterprise upgrading. These findings provide implications for transitional economies in promoting enterprise upgrading through tax incentives.

KEYWORDS:

• Value-added tax reform
• enterprise upgrading
• China
• tax incentive

JEL Codes:

• D24
• H25
• O14

Acknowledgments

Work on this paper benefited from the financial support of the National Natural Science Foundation of China (#71803035; #72004052), the National Office for Philosophy and Social Sciences (#18ZDA064), and the Fundamental Research Funds for the Central Universities of China (#JZ2021HGTB0067).

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ In 2017, the director of the National Bureau of Taxation said that the small-scale taxpayers account for over 87% of total pilot taxpayers in China.

² The number 1 is for the transportation industry, and the number 6 is for modern service industries including the R&D and technical services, the information technology service, the culture and creativity service, the logistics support service, the leasing service for tangible and movable property, the authentication consulting service.

³ Standards for the rate of education surcharges are as follows. First, before 2011, the rate of education surcharges is set as 3% for those without a specific rate of education surcharges. Second, after 2011, if the education surcharges and the local education fees are reported separately in the annual report, then the rate follows the reported one; if the annual report only reported the education surcharges but no local education fees, then the rate is set as 5%. Third, if the education surcharges or the rate was still uncertain, while the tax and its rate of urban maintenance and construction are relatively clear, then the latter is used, which is normally around 7%, as a proxy for the rate of education surcharges.

⁴ According to a firm’s main business (new version of industrial classification by China Securities Regulatory Commission) and location, we can identify whether this firm is affected by the VAT reform. Firms in manufacturing sector are also considered as the treatment group since the VAT reform extended the deduction chain of the manufacturing sector, which directly affect the scope of product sales and demand for intermediate inputs.

⁵ Thanks to the reviewer for the professional comment. We considered whether the control variables affected the treatment status.

⁶ As suggested by one reviewer, we also provide regression results without controlling the industry-year fixed effect. The results are consistent.

⁷ Thanks to the reviewer for this suggestion.

⁸ Thanks to the reviewer for this constructive comment.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [71803035, 72004052]; National Social Science Fund of China [18ZDA064]; Fundamental Research Funds for the Central Universities in China [JZ2021HGTB0067].