Developers set to benefit under China’s VAT pilot scheme

Reading Time:2 minutes

With property sales of more than 180 billion yuan in 2015, China Vanke could save 3 billion yuan under the new tax reform. Photo: Reuters

Published: 2:20pm, 29 Mar 2016Updated: 2:20pm, 29 Mar 2016

China’s property companies will pay value-added tax instead of business tax starting May 1 under new taxation reform introduced by the central government, with analysts estimating potentially significant tax savings for developers and a boost to the commercial sector as more office buildings will be purchased.

The long awaited VAT pilot programme, seen as an important part of China’s fiscal and taxation reform, has been expanded to all industries including real estate and the construction sector.

To replace the current business tax of 5 per cent, developers will be levied an 11 per cent VAT effective May 1, with the land cost being deductible, according to a new notice from the country’s financial and taxation authorities.

With land price deductible, an 11 per cent VAT based on a 30 per cent gross profit – the industry average level – means a 3.3 per cent actual tax rate. When compared with the previous 5 per cent business tax on sales developers can save an average 1.7 per cent in tax on their property sales, Huatai Securities wrote in a note last week.

Sales of properties held for at least two years will be exempt from VAT，while large properties in the four biggest cities will still be taxed. Photo: Xinhua

The savings could be significant. Take China Vanke, the country’s biggest home developer, as an example. It recorded property sales of more than 180 billion yuan (HK$214.7 billion) in 2015, so a 1.7 per cent saving equals 3 billion yuan.

Developer margins have narrowed in recent years due to surging land costs, making VAT much more preferable to developers over a flat business tax.

Swiss bank UBS expects VAT reform could improve Chinese developers’ operating margins by an average of 2 per cent in 2016 over 2015 levels.