The expansion of the value added tax (VAT) scheme which was trialled in Shanghai has been delayed. With ten cities and provinces waiting to join, the program had been expected to begin outside Shanghai in late May or early June, but will be postponed until early October.
According to internal documents, the trial will begin in Anhui on 1 October, with a source close to China’s tax authorities saying: “Other applying cities and provinces that get approvals will probably also start the reform at the same time.”
Under the pilot reforms in Shanghai, a VAT was levied on sectors such as transportation and various service industries to replace a business tax (BT) which was based on revenue of an enterprise. Under the new program, the VAT is levied on the difference between a commodity’s price before tax and its cost of production.
Although significantly higher for some sectors, the BT tax rate was generally three to five percent. Under the VAT program, tax rates range from three to seventeen percent.
The system aims to boost growth in service industries and promote structural taxation reduction. With the potential to remove inefficiencies facing businesses, the VAT reforms may bring considerable economic benefits. Under the new system, the taxpayer is likely to end up paying less tax after recovering input VAT from the output VAT. Areas with VAT schemes are also likely to be more attractive to service companies.
As such, many regions are keen to join the program including Beijing, Tianjin, Chongqing, Xiamen and Shenzhen, as well as the provinces of Jiangsu, Hunan, Hainan, Anhui and Fujian. According to Zheng Jianxin, deputy director at Chinese Ministry of Finance’s Taxation Department, China aims to spread the reforms countrywide by 2015.