The Ministry of Finance (MOF) and State Administration of Taxation (SAT) have officially announced the pilot programme of indirect tax reform under which business tax is replaced by value-added tax (VAT). Highlights of the pilot programme of reform are as follows:
- On the basis of the existing VAT standard rate of 17% and low rate of 13%, two more low rates, 11% and 6%, are added. The 17% VAT rate applies to the leasing of tangible movable property, the 11% rate applies to the transportation and construction industries, while the 6% rate applies to certain modern service industries.
- For the transportation, construction, post and telecommunications, modern services, and cultural and sports industries as well as for the sale of immovable property and transfer of intangible assets, the regular VAT computation method applies. For the finance, insurance, and daily home services, the simple VAT computation method applies.
- The taxation base of the taxpayer is in principle all incomes derived from taxable transactions. For industries involving large amounts of funds received, transferred or paid on behalf of clients, such receipts and payments can be deducted from the taxation base.
- For the imports and exports in trade in services, imports are subject to VAT in China while exports are entitled to zero tax rate or tax exemption.
For transitional policy arrangements during the pilot reform period, the pilot programme makes the following clarifications:
- Tax revenue attribution. During the pilot reform period, the existing fiscal system will remain basically unchanged. In the pilot region, after business tax has been replaced by VAT, revenue from business tax that originally belonged to the region will still go to the region. Any shortage in fiscal revenue due to the pilot programme will be borne by the central and local governments respectively according to the current fiscal system.
- Transition of preferential tax policy. The preferential policy on business tax granted by the state to the pilot industries may be extended, but in cases where the problem of double taxation is resolved due to the reform, such preferential policy will not apply. During the pilot reform period, appropriate transitional polices will be implemented according to different circumstances.
- Cross-regional coordination of tax categories. For pilot taxpayers, the location of their establishment is the location of their VAT payment; any business tax paid by these taxpayers in another location may be deducted from their VAT payable. For non-pilot taxpayers engaged in business activities in a pilot region, they should continue to file and pay business tax in accordance with the existing regulations on business tax.
- Integration of VAT deduction policy. When a taxpayer of existing VAT purchases services from a pilot taxpayer, the VAT invoices obtained can be used to offset input tax in accordance with current regulations.
The pilot programme further clarifies that SAT is responsible for levying the VAT replacing business tax. SAT is also responsible for formulating measures for the levying of VAT in the pilot reform region; expanding the VAT management information system as well as tax collection and administration information system; designing and producing the VAT invoices for the cargo transportation industry; and making full preparation for tax collection, administration and implementation.
Moreover, MOF and SAT announced the implementation measures for the pilot programme of levying VAT in place of business tax in the transportation industry and certain modern service industries, regulations on issues related to the pilot programme of levying VAT in place of business tax in the transportation industry and certain modern service industries, as well as regulations on the transitional policy in relation to the pilot programmes of levying VAT in place of business tax in the transportation industry and certain modern service industries.
Commenting on the pilot reform programme, responsible persons from MOF and SAT pointed out that replacing business tax by VAT can help improve the tax system and avoid double taxation; advance division of labour and promote integration of the tertiary industry; lower enterprise tax cost and enhance the vigour of enterprises; as well as optimise investment, consumption and export structure.
“It also represents an important step in promoting VAT transformation,” said a responsible person at SAT. The VAT reform launched earlier, which transformed VAT from production-based to consumption-based, was incomplete. The reason is, under this transformation, VAT and consumption tax on machinery and equipment can be deducted, but machinery and equipment only account for about one quarter of the investment in fixed assets (which include machinery, equipment and factory buildings). Since factory buildings etc in fixed assets are subject to business tax, full transformation did not materialise. Hence, subjecting factory buildings to VAT is conducive to VAT transformation.
On the choice of pilot region and industries for the latest round of reform, responsible persons from MOF and SAT remarked that Shanghai as the first mover will help to gain experiences for the full implementation of reform. In choosing transportation as a pilot industry, the main considerations are: first, the transportation industry is closely related to production and delivery and it commands an important position in producer services; second, transportation fee falls under the scope of VAT input tax deduction and transportation fee invoices have been included in the VAT administration system, hence the base for reform is stronger.
And in choosing certain modern services as pilot, the main considerations are: first, as modern services are an important indicator for measuring the level of economic and social development of a country, promoting their development via reform can contribute to enhancing the comprehensive strength of the country; second, by choosing certain modern services closely related to the manufacturing industry, the possibility of double taxation can be reduced, this does not only help to promote the development of modern services but also upgrade the manufacturing industry and advance technological improvement.
