China has rolled out a new value-add tax (VAT) system that is collected centrally, replacing a business tax system that was collected by local governments. And more Chinese businesses will soon be able to enjoy the benefit of VAT, as more sectors will replace their business taxes with the new tax system.
Government data shows that Chinese businesses have saved more than 1.7 trillion yuan ($257 billion) in tax money over the past five years, and the tax reform involved 16 million commercial taxpayers. It has solved the double taxation problems and reduced the tax burdens of Chinese companies.
According to China’s Finance Ministry, government spending reached almost 15.2 trillion yuan in the first nine months, while fiscal revenue grew 9.7 percent from a year earlier. The ministry also said that revenue from the central government jumped 10.6 percent, and revenue generated from local governments rose 8.1 percent. Thanks to rapid growth in the industrial sector, the total industrial VAT increased over 21 percent year-on-year, outperforming the overall VAT revenue, which increased 13.1 percent year-on-year.
Shanghai was among the first cities to participate in this tax reform pilot program. Back in 2011, the city wanted to grow its heavily taxed service sector. Double taxation and low deduction rate was limiting the expansion of businesses. Back then, the service sector only accounted for 58 percent of the city’s GDP, while the number in Beijing already reached nearly 80 percent, according to the National Bureau of Statistics (NBS).
The turning point came in 2012: The government announced replacing the business tax with VAT in transportation and service industries in Shanghai. It spurred the growth of those companies. And Shanghai’s manufacturing sector has benefited from VAT the most. Ossen Group, a bridge-cable manufacturer, for instance, is one of them making a huge tax deduction with the VAT reform, cutting millions of yuan on the transaction.
“There was a 40-million-yuan tax deduction, including purchasing the buildings and construction. That put everything in motion,” said Gu Yuehua, VP of Ossen Group.
The VAT reform is one of the most significant tax reforms ever to be implemented in China, to help the country go from manufacturing-dependent to being more service-oriented, but the system still needs fine-tuning.
“Manufacturing companies, they have had this VAT system for more than 20 years. And a lot of rules were set up 20 years ago, but we have a lot of new challenges, new economics, new types of businesses. That requires the system to make relevant changes. The banking system, financial system, we have a lot of initiatives and creative things. Right now we have the VAT reform just to convert the business tax in service areas to the VAT area,” said Kevin Zhou, tax partner at auditing firm Ernst & Young.