China extends VAT to postal services and railways

Tue 10th Dec 2013

Following the continuing success of the reform of the Chinese VAT regime, two new industries, railway transport and postal services, are to be added to the program.

2014 sees postal and railway service VAT reform

China’s State Council has issued an edict recently adding postal services and railway transportation to the reform of the existing Chinese Business Tax and VAT systems. This will start on 1 January 2014.

Chinese VAT reform

The reform of Chinese VAT (which was effectively sales tax) began in 2012 in Shanghai.  It has since expanded to include 12 provinces in 2012/13.  It went national on 1 August 2013.  There are plans to bring in Chinese financial services, telecoms and real estate in 2014/15.

The reform includes the withdrawal of the existing Business Tax, charged at either 5% or 3%.  This is a simple sales tax, applied throughout the production chain to the final consumer.  Since there was no scope for companies to reclaim Business Tax incurred on inputs, the tax quickly compounded to become a major cost of production.

The new VAT regime will reflect many of the principles of the OECD VAT guidelines.  The headline Chinese VAT rate is 17%, although many of the new services are subject to reduced rates around 11%.