China Announces Value Added Tax Reforms

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

20 November 2008

As expected, the Chinese government has decided to extend its VAT reforms, which have been trialed in a few selected areas, to the whole country.

The reform, part of China's CNY4 trillion (USD586bn) economic stimulus package, will allow companies to reclaim input tax on a wide range of previously disallowed types of expense, and the government hopes this will encourage fixed asset investment.

The VAT law, introduced in 1994, underwent some changes two years ago, but this will be the first major reform of the legislation. Tax officials anticipate the reform could cost between CNY100bn and CNY150bn in tax revenues.

As part of China's general program to equalize the tax regime between foreign and domestic companies, imported equipment that had hitherto been exempted from VAT, will now be fully taxed, and rebates for domestic equipment purchases made by foreign companies will no longer be available.

VAT rates for small companies will be reduced as part of the reform: the rate for ‘industrial’ small businesses will fall from 6% to 3%, while the rate for ‘commercial’ small businesses will fall from 6% to 4%.

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