Posted by PTL Group
PTL Group
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on Friday, 23 September 2016
in Business in China

How can you benefit from the VAT reform in China?

China has been paving their way to a fiscal reform that will help them achieve the economic and social goals set in previous years. China’s first step towards their fiscal transformation was the VAT reform that was implemented in Shanghai in 2012. This initiative was expanded to pilot sectors across the country on August 1st 2012 due to its remarkable success and its bolster the slowing economic growth. On May 1st 2016 the reform was officially implemented throughout all China. The reform program seeks to replace business tax with a value-added tax to avoid duplicated taxation and to lower the tax burden.

The trial program launched in 2012 was originally applied to service sectors, telecommunications, and postal services among others. Now, taxes in construction, property and finance are also bound to the tax initiative. The manufacturing industry, which already operated under a VAT structure, will benefit from this reform as they will obtain tax breaks on research and development to incentivize innovation.

The economic players to most benefit from this reform will definitely be the small business owners, who previously ended up paying double the tax and who will now face a tax drop from 5 percent to 3 percent. Larger companies will also be able to deduct more internal transactions; for example the property sector should lower their costs since land purchases will be deductible and this previously represented a large part of their costs. Finally, low-end manufacturers can now invest in machinery and research to improve their operations and drive future growth.

The main challenge will be the reduced budget for local governments, which are expected to lose 125 billion Yuan in revenue due to the tax cut. It should be interesting to see how this tax incentive develops during the year and how the industries, especially the ones not included in the reform, respond to it.


Tax rate before and after the reform

Type of service

Business tax rate before reform

VAT rate after reform

Local freight

3%

11%

Postage, Telecommunications

3%

11%

Construction

3%

11%

Finance

5%

6%

Research and Technologies

5%

6%

IT Services

5%

6%

Culture and Advertizing

3%/5%

6%

Logistics

3%/5%

6%

Leasing

5%

11%/17%

Broadcasting and Movies

3%/5%

6%

Meals, Hotel

5%

6%


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