Beijing Confirmed For Next Chinese VAT Pilot

by Mary Swire, Tax-News.com, Hing Kong

31 May 2012

The Beijing office of China’s State Administration of Taxation (SAT) appears to have jumped the gun by announcing that it has received government approval to be the next city to trial the pilot scheme to replace the existing business tax on the country’s service sector with value-added tax (VAT).

There is no confirmation of when the trial in Beijing will begin, but it has been widely expected, after Shanghai began the reform on January 1, this year, that it would be extended subsequently to Beijing on July 1.

The pilot scheme imposes VAT, rather than business tax, on selected service industries, such as transport. VAT was previously only imposed on manufacturing companies. The move is part of a plan to amalgamate all forms of China’s turnover taxes into VAT over the long-term.

The imposition of VAT is expected to reduce the tax burden on the service sector, as business tax is calculated on a firm’s gross revenues, rather than only on added value. It should also avoid double taxation issues in that sector, whereby, currently, some products have been subject to VAT after manufacture, and then business tax when sold.

It is hoped that the reduced taxation will go some way to help smaller firms in the Chinese services sector that have been greatly affected recently by increased costs and restricted credit. According to SAT’s calculations, the replacement of business tax with VAT could result in reduced tax revenue of more than RMB100bn (USD15.75bn), create 700,000 new jobs, and produce a 0.5% and 0.7% growth in China’s gross domestic product and exports, respectively.

In the pilot scheme in Shanghai, the government has introduced two new 11% and 6% VAT rates for the services sector, compared with the current normal VAT rates of 17% and 13%. The transport industry in Shanghai pays the higher 11% rate.

It is not yet known, and Beijing’s SAT office did not disclose, exactly which service industries will be included in Beijing’s scheme, and which of the tax rates each will pay.

As it pursues its long-term aim of developing the Chinese services sector, the government has indicated that it will speed up the pace of the VAT reforms, with some further cities and provinces being included later on this year, possibly, October 1, and others waiting until the beginning of next year.

It is reported that, apart from Shanghai, applications have been made by ten cities and provinces to take a part in the VAT pilot scheme – Beijing, Chongqing, Shenzhen, Tianjin, Xiamen, as well as five provinces.