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China Expands VAT Pilot Scheme

by Mary Swire,, Hong Kong

30 July 2012

At a meeting on July 25 of China’s State Council chaired by Premier Wen Jiabao, it was decided to expand the scope of the value-added tax (VAT) pilot scheme, currently being tested only in Shanghai.

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

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 some products have been subject to VAT after manufacture, and then business tax when sold.

Within the pilot scheme in Shanghai on January 1 this year, the government initially introduced two new 11% and 6% VAT rates, compared with the current normal VAT rates of 17% and 13%. The internal transport industry in Shanghai pays the higher 11% rate, while modern services, such as information technology, cultural and creative services, logistics and ancillary services, certification and consulting, pay 6%.

Subsequently, earlier this month, a lower 3% VAT rate was added to the scheme for certain services, including international transportation, shipping agencies, animation products and the leasing of property owned prior to 2012.

The State Council has now decided that, from August 1, 2012 until the end of this year, the scheme will be extended into Beijing, Tianjin, Xiamen and Shenzhen, as well as the provinces of Jiangsu, Zhejiang, Anhui, Fujian, Hubei and Guangdong provinces. It is hoped that next year the scheme could go nationwide.

The tax reductions effected by means of the VAT should help smaller firms in the Chinese services sector that have been greatly affected recently by increased costs and restricted credit.

According to previous calculations by the State Administration of Taxation, the replacement of business tax with VAT could result in reduced tax revenue of more than RMB100bn (USD15.7bn), create 700,000 new jobs, and produce a 0.5% and 0.7% growth in China’s gross domestic product and exports, respectively.

TAGS: tax | economics | business | value added tax (VAT) | sales tax | fiscal policy | China | tax rates | services

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