Firms get back part of tax payments
Shanghai tax authorities have begun refunding part of the taxes levied on business owners during a trial run in the city of a value added tax (VAT) intended to replace the sales tax.
Companies that have paid the VAT are now being compensated by the local government for part of the increase in their tax liabilities, according to taxation officials and business owners.
The fine-tuning comes amid heightened speculation that Beijing plans to expand the trial reform to other parts of the mainland.
Shanghai authorities led the trial reform in January this year, replacing sales tax with VAT for logistics and 'modern service' companies.
The reform was meant to ease their tax burdens, but a poll conducted by the China Federation of Logistics and Purchasing showed that two-thirds of 120 corporate respondents ended up paying more under the new system.
Logistics service providers were subject to a tax of 3 per cent on their total sales before the reform. Under the trial reform, the authorities levied VAT at a rate of 11 per cent.
The percentage was based on the value they added to their finished products, calculated by subtracting invoiced costs from sales. The difference between the two is considered to be the value added.
Though many invoices the companies obtained from their suppliers were described as invalid by the taxation officials, the companies' tax liabilities ended up being higher, and the municipal government agreed to pay back 70 per cent of the increased tax payments.
'It is a message that the authorities are resolute about deepening the reform,' said Wang Yao, dean of the department of public finance and taxation at Shanghai Lixin University of Commerce. 'But it will be a long time before businesses reap the benefits of the reform.'
The Ministry of Finance is expected to expand the trial programme to Shenzhen, Beijing and Anhui province by October, Lachlan Wolfers, a tax partner at KPMG China, told the South China Morning Post in an interview last month.
Pursuing the reform could place Beijing on a collision course with local governments, which are reluctant to implement it because the measure may result in lower tax revenues for them.
Under the present tax system, local governments can keep all payments of sales tax for themselves, whereas they are expected to turn in part of the VAT to the central government - though Beijing has yet to announce a final decision on the matter.
'The fissure between the central and local governments is the root cause of the unsuccessful run of the trial reform,' said a chief financial officer at a Shanghai-based company who is close to the local tax authorities. 'The outlook is still uncertain.'
When the State Council announced in October that it would reform the business tax regime, government researchers predicted the new VAT, if implemented across the mainland, could reduce tax collections by 400 billion yuan (HK$490.35 billion).
In the middle of last month, Xu Shanda, a former deputy director of the State Administration of Taxation, told a conference that it would take at least 10 years to expand the reform nationwide, because central and local governments would take a long time to work out a solution.