Central Chinas Hubei province has become one of the pilot cities of a value-added tax pilot program to replace the business tax with a VAT from August 1 this year, according to a decision handed down by an executive meeting of the State Council, Chinas Cabinet.

The state Council said that the VAT will be applied to the transport sector and part of service industries in Beijing and Tianjin municipalities, Jiangsu, Zhejiang, Anhui, Fujian, Hubei and Guangdong provinces, as well as the cities of Xiamen and Shenzhen.

A business tax is a tax on the gross revenue of a business, while a VAT is a tax levied on the difference between a commoditys price before taxes and its cost of production, according to Xinhua.

As the first city to try the VAT reform, Shanghai attracted 12 transnational companies to settle its headquarters in the city. It is widely believed that the pilot program will reduce the cost for exporters and make businesses more competitive as it will increase businesses profit margins and decrease the cost of goods and services for consumers.

Hubei is expected to seize the opportunities in its leap-frog development while Wuhan, the provincial capital, is pledged to attract more investment to promote its headquarters economy development.

Chinas VAT pilot is part of a broader tax reform that began in 2009 with the aim of lowering the overall tax burden and boosting certain sectors.