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China Further Expands VAT Pilot Scheme

by Mary Swire,, Hong Kong

06 November 2012

Following approval by the State Council, China's State Administration of Taxation (SAT) has announced that, after adequate preparations, Fujian (including Xiamen city) and Guangdong (including Shenzhen city) provinces have joined the country’s value-added tax (VAT) pilot scheme from November 1, 2012.

SAT started the successful pilot scheme in Shanghai on January 1 this year, followed by Beijing on September 1, and Jiangsu and Anhui provinces on October 1.

It imposes VAT, rather than business tax, on the transportation sector and six selected modern service industries (i.e. research & development, information technology, cultural and creative industries, logistics, and authentication and consulting services). The move is part of a plan to amalgamate all forms of China’s turnover taxes into VAT over the long-term, possibly by 2015. VAT was previously only imposed on manufacturing companies.

The imposition of VAT is expected to reduce the tax burden on the services 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 introduced two new 11% and 6% VAT rates, compared with the current normal VAT rates of 17% and 13%. The transport industry pays the higher 11% rate, while the modern services pay 6%.

One of the major reasons for the switch from business tax to VAT is to support and reduce taxes for small and medium-sized enterprises (SMEs). Under the VAT pilot regulations, small-scale VAT taxpayers with under RMB5m (USD800,000) of turnover in services are subject to a lower 3% VAT rate.

As Chinese SMEs account for more than 95% of businesses and 80% of urban employment in China, and provide 50% of the country's tax revenue, Vice Premier Li Keqiang recently praised the move to VAT as improving competitiveness and promoting stable economic growth.

The final step this year in the expansion of SAT’s VAT pilot scheme will involve the Tianjin municipality, and Zhejiang (including Ningbo city) and Hubei provinces, from December 1.

TAGS: tax | business | value added tax (VAT) | sales tax | China | tax rates | tax reform | services | research and development

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