China to introduce VAT on financial services in 2016

Sun 30th Nov 2014

The Ministry of Finance has indicated that it will launch its Chinese Value Added Tax reforms for the Financial Service Industry in the New Year.

The plan will be to levy VAT on banking and insurance services. This will replace the current flat 5% Business Tax which offers no facility for the recoverability of input taxes. This means taxes cascade and grow through the supply chain, which makes many more sophisticated products (such as life insurance) highly expensive and workable. However, there is still much uncertainty and debate ahead on the calculation of interest taxes and credit.

The eventual VAT rate on financial services will be between 11% and 16%. It is likely that the implementation date will be 1 January 2016.

Chinese VAT reforms

It is part of a wide scale Chinese VAT reform started in 2012. This aims to replace the old VAT regime, and Chinese Business Tax, on a range of goods and services. Initially it was launched in a number of pilots, but the reform was accelerated in 2013 to include the whole country. Once the Financial Service reforms are complete, this will only leave Real Estate and Consumer sectors unreformed.

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