China’s VAT Reform Moving Forward
By Rainy Yao
China’s massive reform to replace business taxes (BT) with a revamped value-added tax (VAT), which started in 2012 as a trial program, is expected to expand to three crucial sectors this year – real estate, finance, and consumer services. The targets for the future of VAT reform in China are contained in the Twelfth Five Year Plan Period (2011-2015), which stipulates that all sectors currently subject to BT should be switched over to VAT by the end of 2015.
To further the implementation of this policy, the State Council announced on May 18 that the VAT reform would be expanded to include construction, real estate, financial services and the somewhat opaque ‘life’ services.
The Ministry of Finance has recently laid out a draft reform plan involving these sectors. Though no detailed plan has yet been released, a six percent tax rate is set to be imposed on the financial industry, likely starting October 1, 2015. The new VAT rate would likely raise the tax rate applicable to Chinese financial firms – currently, financial services companies are subject to a BT of only five percent. However, given that taxpayers may offset their VAT paid with VAT received, the tax burden may in the end be lower.
Further, the risk of double taxation is eliminated, as the sale of goods and the provision of services will no longer be treated separately.
Meanwhile, according to the draft legislation, an 11 percent tax may be levied on property and construction companies, while a 6 percent rate may apply to consumer service/life services industries.
BT and VAT are two of the country’s three major indirect taxes. However, BT is a local tax, whereas VAT is levied by the central government. This means that once the VAT reform is fully implemented nationwide, tax revenues for local governments will see a significant decline. In addition, real estate and financial services are considered the hardest areas to reform, due to their complexity and impact on society. This has caused widespread concern that the implementation of the VAT reform will lead to an increased tax burden for companies and consumers.
To date, the VAT pilot reform has been applied to railway transportation, postal services, telecommunications and certain modern service sectors such as IT, and film and television. By the end of 2014, the number of pilot taxpayers had increased from 2.73 million to 4.1 million, including 760,000 general taxpayers and 3.34 million small-scale taxpayers. Among these, more than 95 percent of taxpayers have benefited from the VAT reform. During the first half of 2015, tax payable was reduced by more than RMB 110 billion due to the VAT reform, according to the State Administration of Taxation.
The timeline of the reforms is as follows:
- January, 2012 – Initially implemented in Shanghai for the transportation and certain modern services sectors
- September, 2012 – Extended to eight provinces/municipalities: Beijing, Jiangsu, Anhui, Fujian, Guangdong, Tianjin, Zhejiang, and Hubei.
- August 2013 – Implemented nationwide
- January 2014 – Expanded to railway transportation industry and postal services
- June, 2014 – Expanded to telecommunications sector
- October, 2015 – Set to cover financial industries
- End of 2015 – Full implementation
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