Accounting giants urge government to simplify VAT regime

Leading industry players are calling for further steps to simplify the country’s value-added tax system for business, as the government presses ahead with an overhaul of conditions surrounding the VAT, which fully replaced business tax last year.

Its next step for VAT reform includes trimming the number of tax brackets from four to three and lowering the tax rate for sectors including agricultural products and natural gas from 13 per cent to 11 per cent from July 1.

Levies on other sectors remain unchanged: 17 per cent for manufacturing, 11 per cent for transport and property, and 6 per cent for finance, modern services and consumer services.

China’s current four-bracket VAT regime is determined by industry with lower rates also for smaller business and tax breaks for cross-border services providers.

But it has been widely complained by many for being among the most complicated of the roughly 150 nations globally that apply VAT.

Most developed markets have just two VAT brackets: one for general taxpayers, and a preferential rate for select groups.

“Looking ahead, we expect a further trimming in VAT tax brackets, probably into two or even one, to get in line with international tax legislation trends,” said Robert Li, a PWC tax partner in Shanghai.

There is also still scope to cut the current 17 per cent rate considerably, which remains high compared with neighbouring countries, Li said.

Kenneth Leung, EY’s Greater China indirect tax leader, said he wouldn’t be surprised if Beijing trim rates in future, noting it depends on several factors such as whether the state finances can afford the loss of revenues brought about by cutting rates.

China’s tax revenue growth has been declining since 2011 and dropped to 4.8 per cent last year, according to data from the State Administration of Taxation.

But revenues rose 11.8 per cent year on year to 3.3 trillion yuan in the first quarter.

“China’s fiscal revenue is under pressure and it is still too early to say whether that better-than-expected first quarter tax revenue growth can be sustained into a full turnaround,” said Hu Yijian, a professor at Shanghai University of Finance and Economics.

“Simplifying VAT is the long-term goal, but I don’t expect to see any major cuts made, from 17 to 11 per cent rate, for instance, within the next two to three years, considering the fiscal pressures facing the country.”

Since May 1, 2016, four sectors – finance, construction, property and consumer services – have been the last to see VAT replace business tax, in the process cutting the tax burden on companies by some 680 billion yuan (US$99 billion) in its first full year in force.

However, the authorities also admit the changes in the tax regime have meant higher taxes for around 2 per cent of businesses.

“The current multi-rate system still causes confusion among some taxpayers,” said EY’s Leung, using the example of telecom services firms, which could face rates of either 6, 11 or 17 per cent, depending on how tax authorities in different regions define their business category that could see different rates.”

In practise, he added, the tax authorities could also decide to charge different taxes in different regions.

But he expected it will still take some time for Beijing to further clarify conditions in key sectors such as asset management financial products, for instance, which is also expected to see new rules take effect from July 1.