China has an unusual form of VAT. In order to ensure the neutrality of its system of indirect taxation, which has gained importance after its accession to the WTO, China is considering a reform under which the scope of VAT is extended to services and the right to deductions is extended to capital assets. Naturally, the envisaged reform has financial consequences, not only for the central government, but also for the provinces, and those consequences are not parallel. In this article, the authors analyse the financial consequences of the modernization of the Chinese system of indirect taxation, and of several options to remedy the negative impact of the proposed amendments.