Manufacturers moving inland from Hangzhou as central province VAT reform kicks in

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Textile manufacturers in and around Hangzhou, long one of the region’s pillar industries, are beginning to move their operations inland as China reduces the VAT burden in the central provinces.

Beginning July 1, 2007, the Ministry of Finance and the State Administration of Taxation reduced the VAT burden in eight sectors within 26 specified industrial cities in the six central provinces of Anhui, Henan, Hubei, Hunan, Jiangxi, and Shanxi.

The new system, which applies to both domestic and foreign invested enterprises in the central provinces, benefits general taxpayers engaged in the equipment manufacturing, petrochemical, metallurgy, automobile manufacturing, agricultural product processing, mining, electrical power, and high/new technology sectors within the 26 specific industrial cities.

The input tax can be deducted upon activities listed below:

  • purchase of fixed assets (including fixed assets obtained as donation and capital injection)
  • goods purchased or services obtained for self-produced fixed assets
  • fixed assets obtained by financial lease and the lessor paid VAT as per the relevant tax regulation (Guoshuihan [2000]514)
  • transport costs paid for fixed assets

Younger, Peacebird and Progen, famous textile companies originally from Zhejiang, have already moved their manufacturing bases to the central provinces in a bid to cut costs. “The transfer of the textile industry from the east coast to the central and western regions is already going on, this VAT reform will expedite it,” says Mr. Han Licheng, vice chairman of the Zhejiang Provincial Clothing Association.

Some have complained however, that although production costs are reduced in the central provinces, the environment for manufacturing is still not as good as in Zhejiang province. While companies are looking to move their production facilities inland, many are keeping their operations base and supply chain in place in the eastern provinces.

For business advisory services, assistance establishing, structuring or operating a business and contract drafting in Hangzhou, please contact Helen Ye in the Hangzhou office of Dezan Shira & Associates, tel. [571] 5685 9956.

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