China tax tweak

Customers in China's first official Hello Kitty-themed restaurant in Shanghai. From May 1, VAT will replace business tax in sectors such as consumer services, a move expected to cut taxes by over 500 billion yuan (S$104 billion) this year.
Customers in China's first official Hello Kitty-themed restaurant in Shanghai. From May 1, VAT will replace business tax in sectors such as consumer services, a move expected to cut taxes by over 500 billion yuan (S$104 billion) this year. PHOTO: REUTERS

In an effort to restore vigour to the sputtering economy, the Chinese government is embarking on two major changes to its taxation system.

New VAT for businesses to cut costs

Hotel chain Days Inn China is among millions of businesses that will pay less tax from next month as Beijing overhauls its taxation system in its latest bid to propel its sputtering economy by lowering business costs.

"This tax reform is helpful because it's challenging now. The price of everything is going up, be it labour, material or food costs. So lower taxes will help with rising operating costs," said the firm's chief executive, Mr Harry Tan.

From May 1, value added tax (VAT) will replace business tax in the construction, real estate, finance and consumer services sectors - a move expected to slash taxes by more than 500 billion yuan (S$104 billion) this year as China braces itself for a record fiscal deficit. Last year, economic growth slowed to its lowest level in 25 years.

VAT now essentially replaces business tax in all sectors after the reform was first piloted in financial hub Shanghai in 2012. The latest change brings more than 11 million firms under the new VAT rules.

Beijing has championed the new policy as a vital step in the country's structural, supply-side reforms. Premier Li Keqiang has stressed its importance in promoting economic restructuring and industrial transformation and has pledged lower taxes across the board.

"We are reducing the tax burdens on firms with the aim of helping them counter downward economic pressures," he said during a visit to the State Administration of Taxation earlier this month. "Moreover, it will avoid double taxation. This is a significant reform and we must ensure the tax cuts are implemented across all industries."

SIGNIFICANT MOVE

We are reducing the tax burdens on firms with the aim of helping them counter downward economic pressures. Moreover, it will avoid double taxation. This is a significant reform and we must ensure the tax cuts are implemented across all industries.

CHINESE PREMIER LI KEQIANG, on the introduction of value added tax.

Vice-Finance Minister Shi Yaobin said at a press conference yesterday that the change will also help push the development of a modern service sector, which made up more than half of the Chinese economy for the first time last year.

China has long imposed VAT on tangible goods but services are subject to a business tax. This levy imposed on the value of a firm's gross revenue, however, includes the cost of inputs incorporating tax charged by the firm's suppliers. Service firms are thus charged a tax on tax.

VAT, on the other hand, is seen as more efficient, taxing instead the difference between the price a customer pays, minus the cost of materials and other taxable inputs. Only the value added at each link in the production chain is taxed.

Experts say the VAT reforms will promote market-oriented investment and technology upgrades, for instance, as these might now be tax deductible for firms. It will also encourage innovation with consumers benefiting down the line.

"It may not happen immediately because costs may take a while to be realised, for example, upon the replacement of capital equipment or other fixed assets, but those savings will be realised over time and passed on," KPMG China head of indirect tax Lachlan Wolfers told The Straits Times.

A recent commentary by the official Xinhua news agency also called the tax cut a "bold step". "(It's) not just a short-term fiscal stimulus, but a far-reaching reform measure that removes economic distortions and improves the business environment for the long run," it said.

But as the new tax deadline looms, concerns have mounted over unintended consequences and whether small businesses can cope with the new requirements. Mr Shi, however, played down concerns that the reform, which will allow firms to include real estate for tax deductions, will fuel a sharp uptick in property purchases and lead to rising prices.

A version of this article appeared in the print edition of The Straits Times on April 13, 2016, with the headline 'CHINA TAX TWEAK '. Print Edition | Subscribe