China to Expand VAT Reform Nationwide Starting August 1, 2013

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Apr. 11 – China’s State Council announced yesterday that it will expand the current value-added tax (VAT) reform nationwide and include more industries under the pilot scope.

According to the statement released by the State Council, the VAT reform, which replaces business tax with value-added tax in the transport sector and certain services sectors, will be rolled out nationwide from August 1. Moreover, the film, radio and television industries will also be included in the pilot reform. It is estimated that the widening reform will save companies about RMB120 billion in tax payments this year.

In addition, the government will extend the reform at “an appropriate time” to cover the railway transport, postal services and telecommunication industries.

The State Council said the reform is intended to boost business vitality, create new growth engines, increase employment and raise residents’ incomes, as well as to promote sustainable and healthy development in the country. As of February 1, the reform has saved more than RMB40 billion for over 1 million taxpayers that have participated in the pilot program.

According to experts, the decision to expand the reform nationwide comes earlier than expected, indicating the government is taking a more proactive and pragmatic stance.

China’s VAT reform was first introduced in Shanghai on January 1 last year, and was later expanded to another 11 regions. There have been uneven results during the transitional period prior to the national implementation of this tax reform, as pilot taxpayers have not been able to obtain special VAT invoices from non-pilot taxpayers outside of the pilot regions to credit their input VAT, and vice versa. However, with the upcoming nationwide implementation, this issue will be resolved by establishing unified treatment across the country.

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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.

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Guangzhou Releases Plan for VAT Pilot Collection

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China Releases Announcement on VAT Collection in Beijing and Other Regions

6 responses to “China to Expand VAT Reform Nationwide Starting August 1, 2013”

  1. Michael O'Leary says:

    I am confused. Our freight forwarder has told us the following:

    “Once the State’s pilot on taxation policy for international freight forwarders becomes effective, freight forwarding companies are required to use the special VAT invoice for freight transportation services mentioned above, which will include a six percent VAT fee.”

    Your article indicates the reform has saved money, and replaced the Business Tax with the VAT. We import from China a couple of containers a month worth of goods manufactured in an export trade zone. My question is simple: Will our transportation costs now go up by 6%?

  2. @Michael: Freight forwarders engaged in the international transportation service can enjoy zero percent VAT rate upon approval from competent tax authorities, and such entities may issue ordinary invoices instead of special VAT invoices for freight transportation.

    However, if the freight forwarder cannot obtain approval from the tax authority, it will issue a special VAT invoice for freight transportation and a 6 percent VAT rate will apply. But as entities can deduct the input VAT from output VAT after the tax reform, their actual tax burden may be lower. For foreign entities receiving the service, their transportation costs may go up as the invoice issued to them includes the costs of service and value-added tax.

    Hope that helps. Best regards – Chris

  3. Ari Suri says:

    Need information of implementation of vat tax on freight

  4. @Ari Suri: We need you to be more specific really in answering this question, its too general.
    However, what I can say is the same as I said above – that Freight forwarders engaged in the international transportation service can enjoy zero percent VAT rate upon approval from competent tax authorities, and such entities may issue ordinary invoices instead of special VAT invoices for freight transportation. However, if the freight forwarder cannot obtain approval from the tax authority, it will issue a special VAT invoice for freight transportation and a 6 percent VAT rate will apply. But as entities can deduct the input VAT from output VAT after the tax reform, their actual tax burden may be lower. For foreign entities receiving the service, their transportation costs may go up as the invoice issued to them includes the costs of service and value-added tax.

    Hope that helps – Chris

  5. we are architects based in UK (and VAT registered) and currently working with a Chinese company on a project in China. Do we send out our bill with VAT at 20%. are there any other VAT costs we should be aware of?

  6. @Collette -this is a question for your UK tax advisors / accountants as it involves the collection of VAT in the UK. Please refer to them on this issue. Best regards – Chris

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