China outlines plans for VAT and Business Tax overhaul

Sun 10th Apr 2011

In March 2011, a new Chinese five-year plan was approved, which includes measures to overhaul the complex and restrictive indirect tax system.  This covers the change to Chinese VAT and Business Tax (BT) to bring them into line with globally accepted standards for an efficient and growth-orientated taxation system.

Reform of a complex and inefficient Chinese VAT compliance regime

Under the current indirect tax regime, there are several taxes imposed on goods and services.  VAT is levied on the supply of goods.  Business Tax is charged on the provision of most services and property.  Aside from the dual complexity, the BT regime does not provide for the offset of VAT incurred (input VAT), so can result in double taxation for companies.  In addition, the VAT system can act as a barrier to outbound trade as there are restrictions on the refund of input VAT for exporters of goods and labour-based services.

The reforms plan for the extension of VAT to all goods and services, with BT being withdrawn eventually.

The government has also indicated that it wishes to reform the allocation of indirect taxes between the regional and central government.