Beijing readies trial VAT for services

Tax scheme expected to be rolled out nationwide next year in broad reform designed to cut levy duplication and ease burden on business

PUBLISHED : Wednesday, 17 October, 2012, 12:00am
UPDATED : Wednesday, 17 October, 2012, 2:59am

Beijing is in the early stage of a trial to put a value-added tax (VAT) on services as part of an overhaul of its tax laws.

VAT previously applied to goods but not on services, said Sarah Chin Pui Pui, tax managing partner of Deloitte Touche Tohmatsu.

Beijing said that under the new tax regime, most services would have a VAT of 6 per cent but transport firms would have a VAT of 11 per cent. Chin said the central government aimed to eventually replace the business tax with VAT.

"The shift from business tax towards VAT is a major reform that will push the restructuring of the economy and the change of direction in the nation's development," the State Administration of Taxation said. "This reform will eliminate repeat taxation, strengthen the competitiveness of services, reduce the tax burden on companies, support the development of small companies and increase employment."

The administration said the switch to VAT would also expand the scale of services and raise their quality.

Chin said VAT reform created a criterion for deduction of tax, unlike business tax, which could not be deducted.

Shanghai was the first city to implement the new VAT regime on January 1, followed by Beijing on September 1 and Jiangsu and Anhui provinces on October 1.

The scheme will start in Fujian and Guangdong provinces on November 1, and in Tianjin and Zhejiang and Hubei provinces on December 1, according to a central government document.

It will be rolled out to the rest of the country next year.

Deloitte tax director Karen Chow said that under the new rules, a company could pass its VAT on to its customers, but it was not so with business tax.

Chow said that if a company had, for example, a 200 yuan (HK$246) profit it would have an after-tax profit of 140 yuan under the new regime, compared to 121.50 yuan under the old one. "This example demonstrates that if you can pass VAT to your customers, you can increase your profit," she said.

By the end of May in Shanghai, 135,000 companies had taken part in the new VAT programme, lowering their combined tax bill by 3.7 billion yuan, according to China Daily.

The VAT system would eliminate duplicate taxation that arose from intermediate goods and services along the supply chain, the State Administration of Taxation said.

It said that export tax rebates would be expanded from trade in goods to trade in services, which would boost the international competitiveness of the country's services trade.

The administration said the new VAT regime also applied to design and research and development, which would drive scientific innovation.