China has decided to expand a value-added tax reform trial to 10 cities and provinces after August 1 to boost the service industry and reduce the tax burden on businesses.

Companies in transportation and some "modern service" industries in Beijing, Tianjin, Shenzhen and Xiamen cities, as well as the provinces of Guangdong, Jiangsu, Zhejiang, Anhui, Fujian and Hubei, will separately start paying VAT instead of business tax over the next five months, the State Council, or China's Cabinet, said in a statement yesterday.

More areas will be added and the trial in "certain industries" will be expanded nationwide next year, the statement said.

The trial was first launched in Shanghai on January 1 this year to expand the VAT program from manufacturing to include the service industry, and was aimed at streamlining taxes in the service sector and cutting taxes for small business. That's part of China's long-term effort to rebalance the economy from one that relies heavily on manufacturing and exports to one dependent on domestic consumption.

Local businesses in the transportation, construction, research and development, information technology, cultural products, leasing and consulting sectors, began accounting for VAT on the services they provide.

Unlike business tax, which is applied to the total revenue of a business, the VAT program allows firms to deduct part of their purchases of goods and services from the amount of tax they should pay. "VAT is a fairer and more transparent tax program," said Kenneth Leung, a partner with Ernst & Young.

For transportation companies that end up paying more tax during the trial period because of higher VAT rate, the trial's national roll-out may help reduce their burden, as more input cost can be deducted, he said.

Zhou Bo, director of the Shanghai Municipal Development and Reform Commission, said on Tuesday that the Shanghai VAT trial has cut tax for a "majority of participants."

More than 135,000 businesses had participated in the program by the end of May, and there was a combined 3.7 billion yuan tax cut for new and existing VAT tax payers in the first five months.