China loses momentum on VAT reform with telecoms delay

Mon 7th Apr 2014

There has been a rare reversal in the highly ambitious reforms of Chinese VAT regime as plans to implement VAT on the telcoms industry has been postponed.

The plan had been to introduce VAT at between 6% and 11% on telecom services to consumers, both voice and data, on 1 April 2014.  This would replace the existing Chinese Business Tax of 3%.  However, the major 3 telco’s have not been instructed to proceed yet.

In anticipation of the VAT rise, many of the telecoms companies had started to offer their handsets as free so as to avoid a VAT charge, and help maintain consumer growth.  However, the change from Business Tax to VAT will cost the telecoms companies an estimated 7% in loss of profits since they will struggle to pass on the tax rise to a consumer market than is slowing.

Chinese VAT reform progresses

Elsewhere, the repacement of the simple existing VAT system (essentially as sales tax with limited opportunity for input VAT recovery be companies) has made fast progress since the start in 2012.  The first pilot started in Shanghai in the consulting, transport and other service industries.  It was then rolled out to the rest of China in August 2013 for these sector.