China's value-added tax reform is expected to begin in Shanghai from January 1st 2012. It will replace the turnover tax in the transport sector and some service sectors. Shanghai's local taxation bureau says 100 thousand companies will be affected by the reform.

Turnover tax refers to a tax on the gross revenue of a business, while VAT refers to a tax levied on the differences between a commodity’s price before taxes and its cost of production.

"@ Hub" is a company that provides IT technical support to other companies. Even though the change seems to increase their tax from 5 percent turnover tax to 6 percent VAT, the actual amount they are paying is decreasing.

Wu Jiong, deputy finance director of @ Hub said: "Our electricity costs and fix asset purchases are listed under VAT. Therefore we can get a tax deduction for purchasing these for the services we provide."

For service sectors, this reform is a great opportunity. They used to give out turnover tax receipts for every service they provide, which is not deductible for manufacturers. Now they can provide deductible VAT receipts. The services they receive are also tax deductible.

Zhang Ye, CEO of CBI said: "When we heard about this tax reform, we thought about how it will reduce our tax burden and that of our partners’. Thinking about it more, it actually helps us to focus on our specialties."

This reform is very attractive to many service sector businesses like CBI. And that's why Shanghai plans to implement the reform even if it means less tax income.

Chen Yongqi, deputy director of Shanghai Local Tax Bureau said: "Using the VAT to replace turnover tax will solve the problem of double taxation and promote the development of service sectors."

Over 90 percent of companies affected are in sectors related to research and development, technological services, culture, logistics and consulting. It aims to push forward structural tax reduction and boost growth in the country’s service industries.