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China To Expand VAT Pilot To Beijing

by Mary Swire,, Hong Kong

05 March 2012

Following the beginning of China’s pilot scheme to replace the existing business tax on the country’s service sector with value-added tax (VAT) in Shanghai on January 1 this year, it has been confirmed that it will be extended to Beijing, commencing on July 1.

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

It 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, while 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.

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

While Beijing has been confirmed as the second of China’s cities to pilot the VAT scheme, it is not yet known what service industries will be included in its scheme, and at which of the tax rates each will pay. However, the national and local tax authorities are said to be already in discussions on the division of the VAT revenue that will be collected.

Given the government’s plans to go nationwide with the VAT reform for services, many other places in China are applying to be next in line. These are expected to include the cities of Tianjin, Chongqing and Shenzhen, as well as Jiangsu Province.

TAGS: tax | business | value added tax (VAT) | sales tax | China | manufacturing | tax rates | tax reform | services

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