Mainland authorities have been left red-faced after a reform that was designed to ease tax burdens on service firms ended up levying increased payments. A poll conducted recently by the China Federation of Logistics and Purchasing showed that two-thirds of 120 corporate respondents paid more under the new business-tax regime since the new rates took effect in Shanghai on January 1 under a pilot scheme. The mainland's service firms, including logistics service providers, were subject to a sales tax of 3 per cent before the reform. This percentage was based on the value of their total sales. The trial programme that got under way for locally based logistics firms in Shanghai abandoned the tax on sales and replaced it with a value added tax (VAT), levied at a rate of 11 per cent. The change was supposed to reduce their tax rates. Under the new system the value of invoices issued by suppliers of raw materials is measured against the value of the sales invoices issued by the service companies to their customers. The difference between the two is considered to be the 'value added'. The federation's survey showed that 67 per cent of respondents were hit with tax bills of more than 50,000 yuan (HK$61,200) for January alone, while 24 per cent had to pay additional tax of more than 100,000 yuan. 'The new tax regime has given logistics companies a lot of trouble,' said Zhou Zhicheng, a researcher with the federation, who conducted the survey before compiling a report. 'The authorities need to make amends.' Officials from the Ministry of Finance and other government departments have read the report and begun investigations into the problems, he said. Last October the State Council decided to replace the old tax regime applied to service sectors with a VAT system. Government researchers predicted that the new VAT, if implemented nationwide, could reduce tax collections by 400 billion yuan. The change in the business-tax policies was in line with Beijing's blueprint announced in 2009 to rejuvenate key industries, including logistics. A lower tax payment was believed by the central government to be the most efficient incentive that could bolster the country's small and medium-sized businesses. The finding by the logistics federation will be another embarrassment to the mainland's policymakers. Between 2006 and 2007, Beijing limited land supply to cool an overheated property market, only to find the short supply of new houses led to soaring home prices. 'Rigid bureaucracy and chaotic management are the main reasons for the misleading policies,' said Wang Yao, dean of the Department of Public Finance and Taxation at Shanghai Lixin University of Commerce. 'The implementation of the new tax system has proved a flop, at least for now.' Wang said officials should have organised training courses before the pilot scheme to help accountants at Shanghai logistics companies get an understanding of the new rules. Some of the businesses failed to collect valid VAT invoices from their suppliers, he said, so the added value that was found to be subject to VAT appeared bigger than it was in reality. 'Many businesspeople complained to me about the way the taxation officials calculated the added value,' Wang said. 'It was not their fault. But the extra taxes they paid will by no means be returned under the existing system. As far as I know, the officials are racking their brains to find a solution.'