By Courtesy of Zetland Fiduciary
China pilot program of Business Tax ("BT") conversion to Value Added Tax ("VAT"), which started in Shanghai in January 2012, has now expanded to another 8 provinces and municipalities including Beijing, Tianjin, Jiangsu Province, Anhui Province, Zhejiang Province (including Ningbo City), Fujian Province (including Xiamen City), Hubei Province, and Guangdong Province (including Shenzhen City).
BT and VAT are two major indirect taxes in China. VAT is levied on the supply of goods, the provision of repair, processing and replacement services, and on imports at the standard rates of 13% or 17%, while BT is levied on the provision of other services and the transfer of intangibles and real property at rates of 3% or 5% (with a maximum 20% rate applying to the entertainment industry).
The co-existence of the VAT and BT systems causes some industries to be double-taxed, particularly those that are currently covered by the BT regime. The pilot reform aims to resolve the double taxation issues and lower tax burden and boost transport and certain modern service sectors.
Selected pilot industries and applicable VAT rates for the pilot program
The first round of the pilot program started with the transportation industry and certain modern service industries. In addition to the current 17% and 13% of VAT rates, two additional VAT rates, 11% (for transportation service) and 6% (for modern services excluding leasing services) were introduced.
The below services are eligible for VAT zero rating:
? Qualified international transportation services
? Provision of R&D services to overseas recipients
? Provision of designed services to overseas recipients (excluding design services provided for immovable properties located in China
Pilot Program Regions and Progress
According to the otice on Commencing the Business Tax (BT) to Value-added Tax (VAT) Conversion Pilot Reform in the Transportation and Certain Modern Services Industries in Beijing and Seven Other Provinces and Municipalities issued by the Ministry of Finance and the State Administration of Taxation, the following regions completed the conversion according to below schedule:
? September 1, 2012: Beijing Municipality
? October 1, 2012: Jiangsu Province, Anhui Province
? November 1, 2012: Fujian Province, Guangdong Province
? December 1, 2012: Tianjin Municipality, Zhejiang Province, Hubei Province
Further in 2013, the VAT reforms are expected to apply to post and telecommunications, railway transportation and construction and installation services etc.
Impact
As VAT is levied on the added-value, which is normally less than the BT taxable income of total turnover, for former BT taxpayers in the pilot industries, the pilot program is likely to lower their indirect tax basis. But this may not be true in every case. Taxpayers that are able to recover VAT under the current system will benefit under the pilot program, but taxpayers that applies to a higher VAT rate as compared to previous BT rate and without much VAT input may benefit less.
