Following the experiment in Shanghai, the Chinese government has approved Beijing to become the second city that implements a value-added tax (VAT) reform pilot scheme, according to the state-run China National Radio.
Beijing’s tax authorities are in consultation with the city’s 54,000 business tax (BT) payers in order to get prepared for the pilot program set to commence on July 1, 2012. However, it remains unclear how many service sectors will finally be involved in the scheme. In Shanghai – the city that set the first example for such a program – BT impositions are substituted with VAT impositions in six modern service sectors as well as the transportation sector.
By taxing the “value added” throughout of supply chains instead of taxing the business turnover, the VAT reform has the potential to remove the inefficiencies facing businesses that are currently subject to cascading BT, while bringing considerable economic benefits. Areas rolling out the pilot VAT schemes ahead of others will likely become more attractive to service companies.
Therefore, many regions are competing to become the next to introduce the pilot program. China’s other two municipalities, Tianjin and Chongqing, as well as Jiangsu Province and the southern city of Shenzhen, are all in the process of applying for similar VAT reforms.
China aims to spread such reforms to the whole country by 2015, said Zheng Jianxin, deputy director at Chinese Ministry of Finance’s Taxation Department.
However, before China reaches that goal, businesses may find there are some transitional issues for them to address because the VAT program is only practiced in select areas. For instance, when non-pilot taxpayers outside of Shanghai purchase services from pilot VAT payers within Shanghai, what new issues should be taken into consideration?
In a recent case study conducted by global workflow solutions provider LexisNexis, a Shanghai-based service company tried to charge its clients outside Shanghai higher prices due to the “increased” tax rate. Under Shanghai’s current pilot scheme, VAT applies at the rate of 11 percent to transport services and the rate of 6 percent to modern services excluding tangible movable property leasing services. Such tax rates appear to be higher than the BT rates on most services (except entertainment services), which range between 3 percent and 5 percent.
However, since VAT is designed to allow taxpayers a credit for the tax embedded throughout the supply chain, the Shanghai-based taxpayer will very likely end up paying less tax, after recovering its input VAT from the output VAT. In addition, the taxpayer in the non-pilot area may also see its tax burden reduced by purchasing services from pilot VAT payers.
To take full advantage of the pilot VAT scheme, non-pilot taxpayers should gain a thorough understanding of the following regulations when purchasing VATable services from pilot VAT payers:
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