China loses $30 billion on VAT reforms

Mon 2nd Feb 2015

The ongoing reform of the Chinese VAT regime has resulted in a drop in tax revenues of Yuan 192 billion (approx. $30 billion) in 2014 according to the State Administration of Taxation last week.

VAT differences across Chinese industries

The changes in the tax take have not been uniform across industrial sectors, and mainly come from the right to offset input VAT for the first time.  The 2 percentage point drop in the tax rate for railway transportation for instance has led to $130m gain for the industry.

But the telecoms sector has seen a steep rise in VAT charges, particularly with the inclusion of data services in the reformed regime.  This has added up to approximately $1bn in additional fiscal charges on the market.  The three major telecoms companies have also been hit by heavy VAT charges on network infrastructure upgrades which are not yet recoverable.

Chinese VAT reforms

The reform of the cumbersome Chinese VAT regime started with a pilot in Shanghai in 2012. It then was rolled out in 12 other regions, and went national in 2013.

The reforms have been implemented sector by sector. Railways and postal services have been the latest sectors to successfully pass through the reforms. Today, the only major sectors still to go through the reforms are financial services, construction and consumer goods.

The old version of VAT was closer to a turnover tax, with no ability of businesses to offset any turnover tax incurred. This meant there was a spiraling accumulation of the tax through the production chain, placing a disproportionate tax burden on internal consumption. Since China is keen to pivot its economy away from exports to consumption, this was holding back future growth.

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