China's plan to extend VAT to property leaves players bracing for impact

As China will soon push for a reformed value-added tax (VAT) to replace the existing business tax in the real estate industry, last-minute debate is heating up on some of the core issues.

Developers are nervous about whether the change will mean an increase in their tax burden as it is now hard to pass on extra costs to clients and their profit margins are already facing compression. Home buyers want to know if prices will eventually increase. Other investors are keen to know whether any tax cut provided by Beijing during the transitional period will have a substantial impact on China's ability to service its mounting debts and support its efforts to boost the economy.

"Having been involved in these tax reforms in a number of countries, the hardest areas to apply VAT are to real estate and to financial services," said Lachlan Wolfers, a tax partner at KPMG.

That is why Beijing is leaving the two, together with construction and services such as catering and hospitality, in the last batch of VAT reform that was started in 2012.

Because real estate involves everyone via various channels such as offices and factories or lease and purchases, decisions on detailed rules and tax rates are so hard that even Finance Minister Lou Jiwei could not give a timetable when asked by reporters during the national parliament meeting in March. "We are launching it this year. But it's hard and I dare not tell you when exactly," he said.

Wolfers told the South China Morning Post that the earliest date for an official announcement is probably Wednesday when the State Council has its weekly meeting, which will then take effect on October 1 at the earliest or January 1 next year at the latest.