Of the many initiatives included in the central government's 4trillion yuan (HK$4.54 trillion) economic stimulus package last November, the overhaul of value added tax (VAT) across all industries was perhaps the most significant.
The key change under the reform moved VAT in China from a production-based system to a consumption-based system, which means that input VAT incurred on fixed assets (with certain exceptions) can now be used by many enterprises to offset against output VAT, resulting in lower VAT liabilities for some.
A second alteration to the VAT regime saw a change in the thresholds so that commercial entities with turnover of more than 800,000 yuan and production entities with turnover above 500,000 yuan can pre-register as VAT taxpayers. The VAT credit on the purchase of fixed assets is only allowed for registered VAT general taxpayers.
In addition, processing factories, companies that formerly had an exemption from VAT on the purchase of fixed assets have had that exemption removed and must now pay the input VAT without being able to get the credit. All changes and concessions apply to domestic and foreign-invested enterprises and were effective from January 1 this year.
According to Annie Lau, director of corporate and China tax at Deloitte in Hong Kong, the VAT overhaul is a significant breakthrough in tax reform in China.
'It will help companies in those industries requiring higher capital investment, mainly the production and manufacturing industries. VAT reform is one way to encourage them to increase their investment in fixed assets and equipment so that they can improve both production levels and efficiency,' she said.
Generally speaking, VAT is divided into production-based VAT and consumption-based VAT, according to the different treatments of input VAT recovery for fixed assets. Unlike consumption-based VAT, for example, production-based VAT does not allow the input VAT for purchased fixed assets to be deducted.