Dual VAT:Goods VAT and Services VAT

The pilot program,which refers to replace the turnover tax with value-added tax(VAT) in Shanghai from 2012,will benefit the service sector.However,it is far from the ideal goal of VAT reform in China.There would be some problems to put the model of Shanghai into practice across the country.Based on relevant international experience and new theoretical results of sub-national VAT,this paper proposes a dual VAT composed of goods VAT and services VAT.As a transition scheme,the dual VAT contributes to eliminate cascading effects of turnover tax.During a transition period,it is suggested to build a clearing house to share the revenue from cross-province transactions according to destination principle of goods or service.To maintain the basic system of allocating revenue from VAT and the regional authority to administer turnover tax,the proposal will reduce resistance in the progress of VAT reform.