Abstract: The fundamental goal underlying the policy of VAT in lieu of BT is to balance fair tax burden, guide resources allocation, and improve performance of enterprises. Due to the differences in the areas of service companies, the tax burden of the industry, and the maturity degree of the deductible chain, the economic consequences that China's taxation transformation from BT to VAT brings to micro-enterprises have been controversial. This research takes samples from the listed companies in pilot areas where the policy of VAT in lieu of BT is put in place, and builds a difference in difference model to test the influence of the policy on the total factor productivity of service firms and the influencing mechanism. First, we find that after the implementation of the policy, the total factor productivity of the service industry enterprises increases. Second, the reduction of the nominal tax burden actually paid by the pilot companies is conducive to realizing the wealth distribution effect between the state and enterprises, and improving the total factor productivity of service industry enterprises. The increase in operating efficiency of pilot enterprises will help realize the value creation effect and improve the total factor productivity of service enterprises. The conclusion of this study contributes to a better understanding of the micro-economic effect and its specific mechanism in the macro-tax reform, and provides empirical evidence for the positive effects of the policy of VAT in lieu of BT.

Key words: the policy of VAT in lieu of BT, wealth distribution effect, value creation effect, total factor productivity (TFP)