China Releases Tax Policies for Nationwide VAT Pilot Reform Adoption
May 31 – On May 24, China’s Ministry of Finance (MOF) and State Administration of Taxation (SAT) jointly released the “Notice Concerning the Nationwide Adoption of Value-Added Tax (VAT) in lieu of Business Tax (BT) Pilot Tax Collection Policy in the Transportation Industry and Certain Modern Service Industries (Caishui  No. 37, hereinafter referred to as ‘Circular 37’)” to guide the implementation of the nationwide VAT pilot reform that will commence on August 1, 2013.
China’s VAT pilot reform was first implemented in Shanghai at the start of 2012, before then expanding to Beijing in September 2012 and Jiangsu, Anhui, Fujian, Guangdong, Tianjin, Zhejiang, and Hubei later in the same year. Before the initiation of the pilot reform, VAT was levied on the sales and importation of tangible goods, and on the provision of processing, repair and replacement services; whereas BT was levied on the provision of other services and the transfer of intangibles and real property. This taxing mechanism resulted in double taxation and other tax inefficiencies and unfairness.
Therefore, the objective of the pilot reform is to improve the efficiency of China’s national tax system, perfect the VAT deduction chain, and reduce tax burdens for taxpayers. The pilot reform has saved participating taxpayers more than RMB40 billion as of February 2013, according to statistics released by China’s MOF and SAT.
Circular 37 contains a series of measures and regulations stipulating the policies that have been proven to be feasible and effective during the preceding pilot period and will continue to be implemented nationwide as the legal framework for the nationwide VAT pilot reform. These measures and regulations are:
- “Measures for Implementing the Pilot Collection of VAT in lieu of BT”
- “Regulation on Issues Concerning the Pilot Collection of VAT in lieu of BT”
- “Regulation on Transitional Policies Concerning the Pilot Collection of VAT in lieu of BT”
- “Regulation on Taxable Services Adopting Zero-Rated VAT and Tax Exemption Policies”
The taxable services covered in the VAT reform and the corresponding tax rates, which will be applied nationwide starting from August 1, are shown below:
Circular 37 also abolished seven previously issued regulations that applied to the preceding pilot period, but will be invalidated from August 1, 2013.
- Notice on Launching the Pilot Collection of VAT in lieu of BT in the Transportation and Certain Modern Service Industries in Shanghai (Caishui  No.111)
- Notice on Taxable Services Adopting Zero-Rated VAT and Tax Exemption Policies (Caishui  No. 131)
- Notice on Several Tax Policies Concerning the Pilot Collection of VAT in lieu of BT in the Transportation and Certain Modern Service Industries (Caishui  No. 133)
- Supplementary Notice on Several Tax Policies Concerning the Pilot Collection of VAT in lieu of BT in the Transportation and Certain Modern Service Industries (Caishui  No. 53)
- Notice on Launching the Pilot Collection of VAT in lieu of BT in the Transportation and Certain Modern Service Industries in Beijing and Other Seven Provinces or Cities (Caishui  No. 71)
- Supplementary Notice Concerning the Scope of Taxable Services Included in Pilot Collection of VAT in lieu of BT in the Transportation and Certain Modern Service Industries (Caishui  No. 86)
- 16th and 18th Provision of Article 3, Notice on Several Policies Concerning BT (Caishui  No. 16)
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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.
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