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Value added tax reform rollout a business boost
By Lachlan Wolfers, John Wang and Shirley Shen |
May 6, 2013, Monday
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Print Edition
Print Edition
CHINA'S State Council announced last month that the value added tax pilot program, currently in force only in selected cities and provinces, would be expanded nationwide, effective August 1.
These reforms, when fully implemented, will align the indirect tax system currently applicable to the manufacturing, wholesaling and retailing sectors of the economy with that of the services sector.
This major expansion will complete the first stage of the rollout of the VAT pilot program across China to the transportation and modern services sector. China's State Council also announced that the VAT pilot program would be expanded to include the production, broadcast and publication of radio, films and television programs.
The VAT pilot program is currently operational in the cities of Shanghai, Beijing and Tianjin, and in the provinces of Jiangsu, Zhejiang, Anhui, Fujian, Hubei and Guangdong. The announcement by the State Council is likely to have the most impact in cities such as Chongqing, Chengdu, Qingdao and Kunming - each of which has a strong or newly emerging services sector. The expansion is likely to be welcomed by the business community, especially multinational companies and other larger businesses.
During the transition period since the commencement of the pilot program in Shanghai on January 1, 2012, the complexity of having VAT apply in some locations and the previous business tax system in others created some confusion. With the nationwide expansion, a level playing field will be created between different sectors of the economy and between businesses operating in different cities and provinces.
Many medium and larger services businesses with turnover of 5 million yuan (US$806,000) a year or more will be required to register as general VAT taxpayers. However, unlike previously, the businesses will now be eligible to claim VAT credits for the goods, fixed assets and services they purchase from other VAT taxpayers, reducing their overall tax burden. Small-scale taxpayers will also benefit from a reduction in their tax burden from a 5 percent business tax to a 3 percent VAT rate.
The intended purpose of the government's policy is to replace the business tax with VAT - to avoid indirect taxes "cascading" throughout the supply chain. This beneficial change will be a welcome development in a country that is already heavily geared toward manufacturing and will facilitate a more efficient and competitive services sector. Ultimately, it may lead to the expansion of the services sector in regions of traditional manufacturing bases.
The State Council has foreshadowed that the next industries to join the VAT pilot program will be postal services, telecommunications and railways. Once this expansion has occurred, the key sectors yet to transition from the business tax to VAT are construction, real estate, financial services and entertainment.
These reforms, when fully implemented, will align the indirect tax system currently applicable to the manufacturing, wholesaling and retailing sectors of the economy with that of the services sector.
This major expansion will complete the first stage of the rollout of the VAT pilot program across China to the transportation and modern services sector. China's State Council also announced that the VAT pilot program would be expanded to include the production, broadcast and publication of radio, films and television programs.
The VAT pilot program is currently operational in the cities of Shanghai, Beijing and Tianjin, and in the provinces of Jiangsu, Zhejiang, Anhui, Fujian, Hubei and Guangdong. The announcement by the State Council is likely to have the most impact in cities such as Chongqing, Chengdu, Qingdao and Kunming - each of which has a strong or newly emerging services sector. The expansion is likely to be welcomed by the business community, especially multinational companies and other larger businesses.
During the transition period since the commencement of the pilot program in Shanghai on January 1, 2012, the complexity of having VAT apply in some locations and the previous business tax system in others created some confusion. With the nationwide expansion, a level playing field will be created between different sectors of the economy and between businesses operating in different cities and provinces.
Many medium and larger services businesses with turnover of 5 million yuan (US$806,000) a year or more will be required to register as general VAT taxpayers. However, unlike previously, the businesses will now be eligible to claim VAT credits for the goods, fixed assets and services they purchase from other VAT taxpayers, reducing their overall tax burden. Small-scale taxpayers will also benefit from a reduction in their tax burden from a 5 percent business tax to a 3 percent VAT rate.
The intended purpose of the government's policy is to replace the business tax with VAT - to avoid indirect taxes "cascading" throughout the supply chain. This beneficial change will be a welcome development in a country that is already heavily geared toward manufacturing and will facilitate a more efficient and competitive services sector. Ultimately, it may lead to the expansion of the services sector in regions of traditional manufacturing bases.
The State Council has foreshadowed that the next industries to join the VAT pilot program will be postal services, telecommunications and railways. Once this expansion has occurred, the key sectors yet to transition from the business tax to VAT are construction, real estate, financial services and entertainment.
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