This major expansion will complete the first stage of the rollout of the VAT pilot program across China to the transportation and modern services sector.
The State Council also announced that the scope of “modern services”, which fall within the VAT pilot program, will be expanded to include the production, broadcast and publication of radio, films and television programs.
The State Council has also foreshadowed that the next industries to join the VAT pilot program will be postal services, telecommunications and railways services. The date that the VAT pilot program will be expanded to these industries has not been announced. However, KPMG in China expects that expansion to occur in the latter half of 2013. Once this expansion has occurred, the key sectors yet to transition from Business Tax (BT) to VAT are the construction and real estate sectors, financial services and insurance and entertainment services.
During the transition period between the commencement of the pilot program in Shanghai on 1 January 2012 and the national rollout on 1 August 2013, the complexity of having VAT apply in some locations, and BT in others, created some confusion and uncertainties. With the nationwide expansion soon to be complete, some of the competitive advantages in sourcing services from areas that had adopted the VAT pilot program, over those that had not, will soon be replaced by a more level playing field.
The expansion of the VAT pilot program in this way is likely to be welcomed by the business community, especially multinational companies and other large businesses. Many of the key benefits are:
- Businesses will be required to register as general VAT taxpayers where their turnover exceeds 5 million Chinese yuan renminbi (RMB) of annual sales income. In addition to paying output VAT on their services, they will be eligible to claim input VAT credits for the goods, fixed assets and services they purchase from other VAT taxpayers.
- Businesses providing services which are subject to the VAT pilot program will be eligible to claim VAT zero rating or exemption for certain types of services which are exported. This compares favorably with the existing position under which the export of services is generally subject to five percent BT. Likewise, where services are provided from overseas parties to businesses in mainland China, which are registered as general VAT taxpayers, VAT withholding obligations apply. However, input VAT credits may now be claimed for the purchase of these services so as to offset any real VAT cost impact.
- Small-scale taxpayers will also benefit from a reduction in their tax burden from 5 percent BT to 3 percent VAT.