Authorities set to simplify complex 4-tier VAT regime

Reforms completed in May gave rise to complaints over intricate regulations and heavy, unfair tax burden

PUBLISHED : Sunday, 08 January, 2017, 7:03pm
UPDATED : Sunday, 08 January, 2017, 10:52pm

China was expected to simplify its value-added tax (VAT) regime in coming years to level the playing field on complaints about rising tax burden and unfairness for businesses, industry watchers said.

The country completed its VAT reform on May 1, requiring the remaining four industries – finance, construction, property and consumer services – to pay VAT instead of business tax.

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Under the overhaul, businesses faced at least four tax rates based on what industries they belonged to: 17 per cent or 13 per cent for sale or imports of products, 11 per cent for transport and property lease or sales, and 6 per cent for finance, modern services and consumer services. Companies offering cross-border services could enjoy a tax break as authorities encouraged companies to move up the value chain. Small business could also enjoy lower preferential rates.

Industry commentators called for a cut in tax-rate categories and trimming of the tax burden, leaving more breathing room for businesses struggling in an economic slowdown.

Chinese Academy of Fiscal Sciences vice-dean Wang Chaocai said too many tax rates meant unfairness for businesses.

“We don’t think it right to levy so many different rates merely by telling the difference of sectors,” he told a forum earlier this month in Shanghai.

PwC tax partner Robert Li said in developed markets there were usually two VAT rates – one for general taxpayers, the other a preferential rate for special products or certain industries that the government wanted to encourage.

“It’s a trend for China to simplify tax rates to follow international practices,” Li said. “But such steps mightn’t be made at one stroke immediately.”

Authorities said the overhaul was set to trim 500 billion yuan (HK$558 billion) from the tax burden this year – 469.9 billion yuan had already been achieved in the first 11 months of this year, according to State Administration of Taxation data.

The overhaul did not necessarily mean tax cuts for every enterprise. Complaints over a de facto heavier tax burden and ambiguity of rules were common. Authorities said 1.5 per cent of taxpayers, or an estimated 160,000 firms, did pay more tax instead.

Li said also said the tax authorities could roll out more explanations to tackle issues raised through daily practices from various sectors to trim ambiguity – dozens of such documents had already been issued this year.

It’s a trend for China to simplify tax rates to follow international practices
PwC tax partner Robert Li

He expected to see legislators start research work on VAT legislation as early as 2017. The National People’s Congress had already listed the item in its five-year plan by 2020.

The current VAT regulation is an interim rule put into effect since January 1, 1994 with several amendments, but not a law.

Businesses are also urged to beef up tax reporting systems to cope with the change.

EY tax partner Kevin Zhou said businesses were under heavier compliance costs in the VAT overhaul and called on businesses to catch up on their tax reporting.

“Or, they will be exposed for risks such as fines for poor tax management,” he said.

Tax authorities are regarded as better equipped than companies, with a nationwide IT system that tracks and manages VAT invoices in tax collection and checking.


Finance Ministry official Wang Jianfan told a briefing in Beijing on Tuesday that four tax rates in the current regime were “too many when compared with other nations” and promised future steps to simplify the rates in the coming VAT legislation.

The VAT overhaul, which began on a trial basis in Shanghai in 2012, is touted to ease the tax burden of services, which accounted for more than half of China’s economy for the first time in 2015 and grew at a faster pace than the whole economy.

Complaints over a chokingly heavy burden of tax and administrative fees are often heard in China.

Industry watchers are calling for an across-the-board tax cut, rather than a “structural tax trim” – which is often accompanied with higher tax to some businesses – to give business more viability.