China delays last phase of VAT reform

Mon 31st Aug 2015

It is expected to be officially announced in the forthcoming weeks that the last-stage of the Chinese VAT reform – introducing the new regime to consumer goods, real estate and banking – will be delayed until the end of 2015 or later.

VAT complexity and slowing growth

Aside from the complexity of these sectors, the expected tax loss from the reforms will be considerable. This may not be sustainable given the slow down in Chinese growth rates in the past year. Chinese VAT reforms cost $30 billion per annum.

Imposing Chinese VAT on financial services, banking and insurance is proving more complicated than anticipated. The European Union has failed to introduce VAT on financial services despite over 30 years of negotiations.

A number of canvassers for the last sectors have put the case that industries will lose out, in particular the real estate construction sector. The imposition of an 11% VAT would dampen the already flat property prices.

China VAT reform to boost growth

China began the reform of its existing VAT regime in 2012 with a pilot in Shanghai. This included introducing full recovery of VAT suffered by business in the production chain to help prevent a cascading of tax increasing production costs. It was also adapted to encourage more production of goods for the domestic market as the economy underwent its huge pivot away from savings and exports to consumption.

The reformed VAT system is also designed to replace the existing Business Services Tax.



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