China Beijing VAT pilot postponed

Wed 27th Jun 2012

It has been reported this week that the planned introduction of Beijing to the Chinese VAT compliance scheme in the services sector is likely to be postponed.   Beijing was the second city chosen, after Shanghai, to act as a VAT pilot in the services sector, with an anticipated commencement in July.  Local media reports indicate the most likely date to be October. This posting reviews the changes in China.

China Business Tax replaced by VAT

The introduction of Chinese VAT in the services sector will replace the business tax currently imposed.  Earlier reports had indicated that the Shanghai pilot had been successful with the majority of businesses reporting reduced tax burdens.  It seems however that the Ministry of Finance has concerns about some unexpected results with transport companies, who appear to have experienced heavier taxation.   The success of the VAT system is dependent on companies being able to take full advantage of input VAT recovery.  This means that transport companies need to be fully able to deduct VAT which they have suffered on payments for road tolls, fuel, and maintenance and repair.  Evidently, invoices for these supplies have been difficult to obtain, and hence VAT deduction has not been possible.

It was recently reported that Anhui province was scheduled to join the VAT scheme in October, with Shenzen also being considered for that date.  Other provinces reported as possibilities were Huang, Jiangsu and five others.

The success of the scheme to date is that, for most service companies, business results have improved in two ways.   Not only have tax burdens reduced, but also their customer offering is more attractive.  Manufacturing businesses who are already making VAT declarations are able to recover VAT suffered on payments they make to these service companies. Thus Shanghai companies currently retain an advantage over those in other provinces, and this has generated  some concern.  Whilst two taxation systems continue to run in tandem, this situation will occur.

By introducing the VAT regime to as many local authorities at the same time or as early as possible , inequity will be minimised.  While plans to overhaul the Chinese fiscal regime were scheduled for completion by 2015, current thoughts are that VAT could be nationwide by the end of 2013.



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