Why VAT reform can save your company money

"After the economic crisis the Chinese government wanted to change the dynamics of the economy and modernise certain industries,” said Lawrence Hu, a tax attorney at MWE China Law Offices in Shanghai. Hu also noted that the move is part of the government's plan to transform China from a manufacturing centre to a country boasting modern services like finance and consulting.

In order to avoid being a factory for the world, it was necessary for the government to consider value added tax (VAT), as it develops service industries and companies can offset the VAT for these services. The law implementing the pilot scheme consisted of multiple joint circulars issued by the Ministry of Finance and the State Administration of Taxation. The pilot scheme began on January 1 of this year in Shanghai and only applies to transport and certain service sectors. So far, the programme has been carried out successfully, according to Hu. Training by the authorities has helped to ensure a smooth implementing process.

Before the pilot scheme, China worked on a double taxation system – business tax and VAT. The new system has a single VAT covering both the goods and services sectors. The replacement of business tax with VAT means while the tax is collected by a business, the end consumer effectively pays it.