CHINA's 17 per cent value added tax (VAT) has ''killed off'' a lot of business and forced retailers of many famous brands to sell through department stores, a leading tax consultant says. Edward Shum, a partner with public accountants Coopers and Lybrand, said many multinational garment companies were breaking into China selling over consignment counters at Yaohan, Isetan, Seibu, Shui Hing and Sincere. ''Department stores have consignment counters so companies which do not have retail outlets in China, can make use of the store's facilities,'' Mr Shum said. ''The advantage is that brand name operators do not have to worry about setting up a company or obtaining a retailing licence. ''They sell exclusively to the department store, which gives them access to the retail market, and they do not have to worry about working out VAT. ''It is the best way for many operators to get their brand known to the Chinese consumer.'' Department stores had to account for VAT liability of the consignment counters and deduct the tax from sales proceeds, he said. Consignment counter operators had to submit invoices showing the store how much the goods cost. ''Companies which do not have retailing licences are responsible for importing their own products, putting them on the shelf and selling them,'' Mr Shum said. ''But it is up to the department store to take the counters' invoices and work out how much profit each counter has made and how much tax the counter owes the government,'' Mr Shum said. Consignment counter operators had more flexibility in terms of VAT liability and did not have to operate under a licence, he said. ''Many companies are able to find tax-efficient ways of getting their products delivered to markets in China,'' he said. ''They use connections and many operators are able to hand-carry products to pay less tax. ''For tax purposes, companies operating under licence have to make sure their goods are properly imported and have to accurately show authorities where their products have come from. ''Licensed companies have more to lose and, if they do not meet all the criteria, they may lose their licence.'' While companies selling over the consignment counter could find effective methods of importing, many large brand names such as Giordano, Gold Lion and Crocodile had opened their own retail and manufacturing outlets in China, Mr Shum said. ''Success of these brand names depends on the efficiency of the company's local production, unlike brands sold at consignment counters, which are 50 to 70 per cent imported and on which duty must be paid,'' he said. ''If brand names with retail outlets are able to cost-effectively produce in China, they will fare better than the consignment counters as they do not have to pay to go through a retailer to distribute goods.'' However, overheads such as distribution, employing a sales team and rents could ''wipe out'' profits if companies were not careful, he said. Many prominent brand name goods retailers had set up manufacturing and retail outlets in China only to find their sales teams ''eating up'' profits. ''Giordano is facing this problem,'' he said. ''Rent for shops in Beijing and Shanghai may not be as high as in Hong Kong, but they are not as cheap as most people think.'' Mr Shum said companies which owned and operated manufacturing and retail outlets in China added 17 per cent to the price of goods at the sales level. ''The prospects for these types of operations is better than those which import products to sell,'' he said, adding that most products were marked up 100 per cent. ''Most do not have to pay other taxes as a small amount of the components are imported and most of the raw materials are found locally, which keeps manufacturing costs down.'' Food retailers were not subject to VAT but paid a five per cent business tax, which was not creditable, Mr Shum said. Although Coopers and Lybrand had not conducted surveys to assess the advantage of paying VAT compared with business tax, Mr Shum said he believed it was easier to prosper paying the lower tax. The business tax is similar to a sales tax and is calculated and paid monthly. McDonald's, Kentucky Fried Chicken, Fairwood and Cafe de Coral all pay five per cent business tax. Mr Shum said China's retailing sector was heading for a period of consolidation. ''Companies now have to work out whether their operating results can support the 17 per cent VAT,'' he said. ''Foreign investors who are interested in retailing in China have decreased the amounts of money they are ploughing into the country. ''People are coming to their senses and are more careful about investing in retail businesses in China.'' However, China's 1.2 billion population encouraged retailers to take a long-term view. ''A lot of investors whose brands are not known are moving into the China market. They are not just looking at the immediate profits; they are putting down strong roots to get their brands recognised. ''The tax situation in China is not going to change and retailing companies have to acknowledge this when they are promoting their brands.''