In 1994, China introduced VAT and business tax, which separately apply, at different rates, to supplies of goods and services. In recent years, it has become increasingly clear that business tax, which is non-deductible, should merge with VAT. In this article, the author explains the VAT pilot in Shanghai that came into effect on 1 January 2012, which is the first step in the process of merging the two taxes. Under that pilot, business tax on specific services is replaced by VAT.