VAT changes seen as easing burden on firms

PUBLISHED : Friday, 28 October, 2011, 12:00am
UPDATED : Friday, 28 October, 2011, 12:00am

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The central government is set to launch a trial value-added tax for businesses next year, which is seen as a clear signal the leadership wants to support growth by easing the tax burden on business.

Premier Wen Jiabao told a State Council meeting on Wednesday that a trial system designed to eventually replace the existing business tax regime with a value-added tax would be implemented in Shanghai from January.

Under the existing system, firms in some industries may have to pay a business tax and VAT, resulting in extra tax burdens. That has contributed to price increases of products and services in certain industries.

The trial would be first applied to the transport and service sectors in the city, with a nationwide launch expected later.

The government said two new lower value-added tax rates, 11 per cent and 6 per cent, would be added to the existing 17 per cent and 13 per cent rates. This move is expected to lower the tax burdens for transport businesses, which now pay 3 and 5 per cent.

'The effect is, to some extent, equivalent to fiscal expansion,' China International Capital Corp said in a research report yesterday. 'In the longer term, the reform will improve the tax system and boost the development of service industries.'

It said warehousing, postal services, computer services, information transmission and the software industry might also be included in the programme. But banks and insurance companies were less likely to benefit because of their already high profits and because of difficulties in imposing an accurate value-added tax on their business.

Timothy Wong, a tax director of accounting firm Deloitte, said China was one of the few countries with a business tax. 'The tax reform is a step in the right direction,' he said. 'However, how much a company can actually benefit from it will depend on the implementation details.'

He said further clarification was needed on what items were deductible and which rates would be applicable.

Tax revenue on the mainland expanded by 27.4 per cent in the first three quarters, well above the initial 8 per cent annual tax revenue growth target set for the full year.

'The central government has deep enough pockets to allow it to launch a series of tax reductions and targeted subsidies policies to support small and medium-sized enterprises,' said Qu Hongbin, an economist at HSBC.

'With this official start to a policy of selective easing, Beijing should and can use its strong fiscal position to strike a better balance between growth and inflationary concerns.'

The CICC report estimated that the tax burden of affected industries might fall by up to 70 billion yuan (HK$85.5 billion) if the reform was adopted nationwide.