China 11% VAT on real estate and construction?

Wed 30th Jan 2013

Following the successes last year of the VAT reform pilot in Shanghai, Beijing and other cities, plans are being rolled out to replace Business Tax with a modernised Chinese VAT.

The reform of the Chinese VAT system started in 2012 as the country looked to eliminate the inefficiencies of the current system, withdraw the Business Tax indirect charge and cut down on double taxation.  It started in Shanghai, applying mainly to transportation services, and has since been rolled out in many other key cities.

11% VAT on Chinese construction?

In is now widely predicted that it will be extend to the large construction and real estate industry, which account for around half of all Chinese Business Tax receipts.  This includes a potential new VAT rate of 11%, although it is still not clear if residential property will be exempt from the new regime.  The standard VAT rate in China is currently 17%.  Business Tax is erratically levied on the Chinese construction industry at 3%, and there is very limited occasion to offset ‘input’ Business Tax incurred against ‘output’ charged.  This means the higher rate would be offset by the ability to deduct any VAT incurred.

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