Telecoms VAT to hit carrier profits

New value-added tax to replace business levyof 3 per cent as part of a mainland-wide trial

PUBLISHED : Thursday, 06 March, 2014, 1:20am
UPDATED : Thursday, 06 March, 2014, 1:20am

Premier Li Keqiang says the mainland will impose a value-added tax on telecommunications services, a move analysts say may cut earnings at the country's three major wireless carriers.

The VAT would replace an existing business tax as part of a mainland-wide trial also to be applied to railway transport and postal services, Li said in a report delivered yesterday at the start of the annual meeting of the National People's Congress. He did not say when the VAT would start or offer other details.

Mainland regulators are pushing the three state-run carriers to cut prices, offer more choices and improve customer service for its 1.2 billion wireless user accounts.

The new tax system might begin as early as next month and could cut 9 per cent from the annual net income of China Mobile, China Unicom and China Telecom, said Ricky Lai, a Hong Kong-based analyst at Guotai Junan Securities.

"This will be the biggest policy change to impact telecommunications coming out of the congress this year," Lai said. "We expect this will increase the tax burden and affect the net income of all the carriers in coming years."

Unicom fell 2.7 per cent to close at HK$10.16 in Hong Kong yesterday. China Mobile lost 0.2 per cent to HK$73.75, while China Telecom rose 0.3 per cent to HK$3.37.

Christopher Lane, a Hong Kong-based analyst with Sanford C. Bernstein, said the VAT would replace an existing business tax of about 3 per cent of revenue.

The precise impact of the change would depend on the level of VAT, which was estimated to be between 6 per cent and 11 per cent, Lane said.

The policy change was expected to allow carriers deductions for some costs, which might offset some of the tax, he said.

"The net impact to each [carrier] will depend on the absolute level of the tax and the deductions they are able to claim," Lane said. "Our modelling suggests that at the lower levels, the tax is neutral as the operators will have sufficient deductions to reduce the burden. However, at the higher levels, we expect it to result in a decrease in profitability in the near term."

The VAT is the latest policy change for the industry following a December reduction in fees carriers pay to China Mobile to connect to the largest wireless network.