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Final 2012 Extension Of China's VAT Pilot Takes Effect

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

05 December 2012


From December 1, China's State Administration of Taxation (SAT) has included the Tianjin municipality, and Zhejiang (including Ningbo city) and Hubei provinces, as the final step this year in the expansion of its value added tax (VAT) pilot scheme.

SAT started the successful pilot scheme in Shanghai on January 1 this year, followed by Beijing on September 1, Jiangsu and Anhui provinces on October 1, and Fujian (including Xiamen city) and Guangdong (including Shenzhen city) provinces on November 1.

The pilot scheme imposes VAT, rather than business tax, on the road 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, the government has 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 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), which account for more than 95% of businesses and 80% of urban employment in China, and provide 50% of the country's tax revenue. Under the VAT pilot regulations, small-scale VAT taxpayers with under RMB5m (USD802,000) of turnover in services are subject to a lower 3% VAT rate.

It was disclosed late last month that, with the expansion of the scheme this month, more than 900,000 firms will be taking part in it. Furthermore, in the first ten months since its introduction in Shanghai, taxes paid by firms there had been reduced by RMB22.5bn, while taxes had been reduced in Beijing by RMB2.5bn in the first two months of the scheme’s operation.

It has been indicated that, in 2013, the scheme could be extended to include the rail transportation, telecommunications and construction sectors, while, geographically, the scope of the reform should include all or parts of the Bohai, Yangtze River Delta and Yangtze River, Pearl River Delta and the Straits economic zones.

TAGS: tax | business | value added tax (VAT) | sales tax | China | manufacturing | small and medium-sized enterprises (SME) | construction | telecoms | services | research and development

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