Oct. 19 – The People’s Government of Guangzhou released the “Notice on the Plan for the Pilot Collection of Value-added Tax (VAT) in Lieu of Business Tax in the Transportation Industry and Certain Modern Service Industries (suifuban  No.47, hereinafter referred to as ‘Notice’)” on October 12, aiming to promote the smooth implementation of the pilot collection. Key information taken from the Notice is as follows.
Contents of the Pilot Collection
Scope and period of the pilot collection
Administrative region of Guangzhou
- Land transportation service
- Water transportation service
- Air transportation service
- Pipeline transportation service
- R&D and technology service
- Information technology service
- Cultural and creative service
- Logistics auxiliary service
- Authentication and consulting service
The conversion from the old tax system to the new tax system shall be completed on November 1, 2012, and the pilot collection will commence thereafter.
Major arrangements of the taxation system for pilot collection
Two lower rates of 11 percent and 6 percent are added on to the current standard rates of 17 percent and 13 percent under the existing value-added tax regime. The tax rate of 17 percent shall apply to the leasing of tangible movable properties while the tax rate of 11 percent shall apply to the transportation industry.
The tax rate of 6 percent shall apply to some of the other modern service industries and the tax rate of 3 percent shall apply to small-scale taxpayers providing taxable services. Taxable services subjected to a zero percent tax rate shall be carried out as prescribed by the Ministry of Finance and the State Administration of Taxation.
Method of tax calculation
Taxable services provided by general taxpayers in pilot regions are subject to the general tax calculation method, with the tax payable being the balance of the current output tax from which the current input tax has been deducted. The taxable service provided by the small-scale taxpayers in the pilot regions is subject to the simplified tax calculation method, with the tax payable being the VAT calculated based on the sales amount and the VAT tax rate, and the input tax cannot be deducted.
Basis of tax calculation
In principle, the basis for tax calculation by a taxpayer shall be all the income and other charges received from taxable transactions.
Import and export of service trade
The import of service trade is subject to VAT for the domestic segment and zero tax rate or the tax free system shall be implemented for exports.
Transitional policy arrangements during the pilot collection period
Ownership of tax revenue
The existing financial system shall be kept basically stable during the pilot period. All the business tax revenue originally directed to Guangzhou still belongs to the city after the imposition of VAT. The decrease in financial revenue due to the imposition of VAT shall be shared by all levels in accordance with the existing fiscal system.
Transition of preferential tax policies
The original preferential business tax policy implemented on the pilot industries by the State shall be continuously carried out according to the “Provisions on the Transitional Policy Concerning the Pilot Collection of Value-added Tax in Lieu of Business Tax in the Transportation Industry and Certain Modern Service Industries.”
Cross-regional coordination of tax categories
The VAT payment place for a pilot taxpayer shall be the place where its institution is located. The business tax paid by such taxpayers at a different place can be deducted when calculating the VAT payable.
Linking up VAT deduction policies
Where an existing VAT taxpayer receives the VAT special invoice for purchasing services from a pilot taxpayer, the input tax can be deducted in accordance with the existing provisions.
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Value-Added Tax Reform
VAT reform is a confusing transition for many and introduces a number of additional questions, such as exactly what types of input VAT are now deductible. Confusion about the new laws may also allow opportunistic companies to charge higher prices and blame the increase on the tax reform. To add some clarity to the issue – and VAT in general – this issue of China Briefing takes a look at a number of VAT-related questions.