China Mobile

New VAT may drive China's mobile operators to cut costs

Market leaders are likely to reduce mobile-phone subsidies as the upcoming value-added tax will erode at least 6pc of their revenue

PUBLISHED : Friday, 07 March, 2014, 10:01am
UPDATED : Saturday, 08 March, 2014, 1:01am

The value-added tax that the mainland's telecommunications companies face later this year might force the three wireless operators to cut expenses, including subsidies promoting smartphone usage, analysts say.

Beijing would use the tax to replace the existing business tax in several service industries, including the telecommunications sector, Premier Li Keqiang reiterated this week.

A trial of the tax has been conducted since 2012 in certain sectors, including public transport, in several cities.

Business tax was about 3 per cent of revenue, said Ricky Lai, an analyst at Guotai Junan International. He said the value-added tax was expected to be at least 6 per cent of revenue, weighing on the earnings of telecommunications firms.

It is impossible for the operators to transfer their [tax] burden to consumers

The new tax might reduce the annual net income of China Mobile, China Unicom and China Telecom by as much as 9 per cent, he said.

"The operators may reduce mobile subsidies and increase offerings of low-end smartphones that cost less than 1,000 yuan [HK$1,266] each," Lai said.

Last year, China Mobile alone spent 27 billion yuan on handset subsidies. The company has said it will increase spending on mobile devices to secure market share this year.

Xiang Ligang, chief executive at telecommunications industry portal said the trial of the value-added tax had shown the impact was complicated. "There are differences among industries and between developed and undeveloped areas," he said.

Although the value-added tax rules allow carriers to deduct some costs, which may offset some of the tax burden, Xiang said it was hard to forecast the real impact. "Whatever [it may be], it is impossible for the operators to transfer their burden to consumers," he said. "The competition is too intense."

Huang Meng, an analyst at Analysys International, had a different view, saying the new tax might not be bad news for the three giants.

He said Beijing's aim was to alleviate the burden on enterprises and cut taxes through the new system because the new tax would allow carriers to deduct some of their costs, provided that there were proper receipts.

Many small players had been able to "legally avoid taxes" owing to the imperfections of the existing system, but with the value-added system it would be more difficult, Huang said.

"But I believe for the three leading firms, this is good news," he said. "They [have] transparent operations. Their business operations are up to the standard of modern enterprises, and it is easy for them to provide proper receipts."