China's VAT reform to impact developers in cooling market
Property and construction sectors likely to see introduction of 11pc value added tax next July, forcing them to overhaul business practices
The mainland's plan to replace the current business tax with value added tax on property and construction firms next year will not only increase the burden for developers in a cooling market but also change how they do business.
VAT reform started with a trial run in Shanghai two years ago, which was then broadened across the mainland and to more industries last year. This year, the central government has implemented it in railway, postal and telecommunications services. The tough sectors to come are property and construction as well as finance and insurance. The deadline for the reform to cover all sectors is the end of next year.
Lachlan Wolfers, a tax partner at KPMG China who has been in talks with mainland tax authorities and developers, said the property and construction sectors would probably start VAT next July, most likely at an 11 per cent rate.
"The experience in other countries is that it's very difficult to introduce VAT in a falling market," Lachlan told the South China Morning Post, citing the example of Malaysia, which has deferred the reform twice and now pushed it back to next April.
An 11 per cent VAT to replace the current 5 per cent business tax would mean a small increase in tax burden for many developers, while a higher rate of 17 per cent - the figure reported by some mainland media - would add significant pressure, Lachlan said.
"The impact on [developers'] cash flow can be just as significant as the impact on overall tax burden," Lachlan added. "It will affect the way developers do business."