Regional Industry Structure, Industrial Tax Burden, and the Effectiveness of the Replacing Business Tax with Value Added Tax Policy: Evidence from Listed Companies in China

Abstract

Abstract This paper investigates the impacts of industrial tax burden and regional industry structure on the effectiveness of the replacing business tax (BT) with value added tax (VAT) policy in China. Using an event study, we find that the stock market reacts positively to the introduction of the replacing BT with VAT policy. Specifically, the market reactions are stronger for the modern service industry than for the transportation service industry because the tax burden in sub-industries of the service sector changes after the shift from BT to VAT. Also, due to disparities in regional industry structure, the policy receives a better reaction in the eastern region than in the central and western regions. We further examine the long-term effects of the replacing BT with VAT policy. The results show that the reform-induced comparative advantages of the first pilot firms in Shanghai diminish gradually as the policy is expanded nationwide. Our findings have meaningful implications for the improvement of the replacing BT with VAT policy and the development of the service and manufacturing industries.