Fundamentally, the replacement of the business tax (a tax on business) with a VAT (a tax collected by business, but effectively borne by the end-consumer) more closely aligns China’s system of indirect taxes with that of the more than 150 countries around the world that have now implemented a VAT.
VAT pilot program
The VAT reforms are currently operational in a pilot program in Shanghai, and it is expected they will be expanded to Beijing from 1 July 2012, followed by several other cities and provinces in early 2013.
The VAT pilot program applies to the asset leasing, transportation, and modern services industries. Also, two new VAT rates were introduced as part of the pilot program—6% rate (modern services) and 11% rate (transportation)—to accompany the existing VAT rate of 17% that applies to most goods and asset leasing activities.
The VAT pilot program has introduced favourable changes for businesses, including eligibility to claim input VAT credits with respect to goods, fixed assets, and services acquired by the business. Also, the rules for import and export services under the VAT pilot program are more generous than under the previous business tax regime—to the effect that import and export services may not attract any effective VAT liability if certain conditions are met. As a consequence of the VAT reforms, many businesses in Shanghai have had a net decrease in their tax burden.
There are four requirements (in addition to the tax implications) that any business must consider in deciding whether it is subject to the VAT pilot program. Also, there are a number of steps that a business would need to consider in order to prepare for the VAT reforms. These are described in a June 2012 report from KPMG.
To read the June 2012 report prepared by the KPMG member firms in China and Hong Kong: VAT reforms in China—a big leap forward