China is to cut value-added tax for Shanghai's transport sector and some service industries from next year in a trial program that could see the reductions extended nationwide.

As part of a tax replacement scheme that will allow some companies to pay VAT instead of business tax from January 1, an 11 percent rate will apply to the transport sector and a 6 percent rate to sectors related to research and development, technological services, culture, logistics and consultation, the Ministry of Finance said yesterday.

Unlike business tax, which is charged on a company's revenue regardless of costs, the expense of fuel and equipment can be deducted from the VAT payable.

The rates are lower than the existing VAT brackets of 17 percent and 13 percent.

The ministry said the lower VAT rate and a series of supportive policies during the transitional period would ease the tax burden for companies.

"It is an important structural tax cut that will help eliminate repeated taxation on goods and services through both business tax and VAT," it said.

"By improving the tax structure and easing the tax burden, the measures will accelerate development of modern service industries and reform of economic structure."

The decision to choose Shanghai, which has a complete range of industries, will help China accumulate experience before the tax reform is applied nationwide, the ministry said.

"The modern service industries have become a main measure for the country's economic soundness," it said. "Starting from sectors closely related to manufacturing industries, the pilot program will encourage upgrade of industries and progress of technology."

Alan Wu, of PricewaterhouseCoopers China, said: "Although the corresponding VAT rate will be higher than the current business tax rate, once companies move into the VAT system they will be entitled to claim tax returns on any VAT paid on business costs such as purchase of goods and services that are subject to VAT."

Wu added: "Shanghai was the initial volunteer for the pilot program, but given the benefits of VAT for businesses it is likely that more cities will volunteer to participate in the future."

Zhen Hong, secretary general of the Shanghai International Shipping Institute, said the 11 percent rate was still higher than Shanghai's major international rivals, but the trend of reducing tax would help Shanghai to realize its ambition to become world's leading shipping center.