China's Manufacturers To Benefit From New VAT Reform

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

22 October 2008

A tax cut in the shape of a VAT reform, expected to cost up to CNY150bn (USD22bn), has been formulated by the Chinese Finance Ministry and submitted to the Chinese State Council in a bid to stimulate the Chinese economy.

The reform involves the revision of the Provisional Regulations on Value Added Tax (VAT). 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 take three months to implement and cost between CNY100bn and CNY150bn in tax revenues.

The reform is aimed at shifting from a production-based VAT regime to a consumption-based system, which is practiced in most countries. The government has already trialed this system in several areas of China, but is now eager to roll the system out nationwide from 2009, not only to advance its tax modernisation agenda, but also to give the corporate and manufacturing sector a timely economic boost amid global economic uncertainty.

The current system means that companies wishing to invest in growth through the purchase of machinery and capital assets are not able to claim VAT deductions on their tax bills. Thus the reforms should encourage more investment in production. Contrary to early speculation, the reform is likely to be applicable in all industries except some restricted by Chinese law. It was previously assumed that the reform would only cover a few specific industries.

China's export growth fell last year, while the trade surplus dropped 2.6% year-on-year, to USD180.9bn, from January to September 2008. Some analysts have forecast that China will have enjoyed increased growth in the first three quarters, at a rate predicted to be above 10%, but the rate is expected to drop in the following few months.

It is predicted that the reform could be introduced on January 1, 2009 but some analysts believe the changes may come into effect ahead of schedule if the economy worsens.

Further reforms are also expected to be introduced for corporate income tax and personal income tax, in the not too distant future.

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