VAT pilot programme expands to Beijing
June 08, 2012 | BY
clpstaff &clp articles &Beijing is set to follow from Shanghai's VAT pilot programme as early as July 1, but it is unclear how closely the city will follow Shanghai's example
The Beijing Municipal Office of the State Administration of Taxation released forms on its website last week to for companies affected by the programme, but did little else to publicise the development.
Similar to Shanghai, the value added tax (VAT) applies to the transportation and certain modern service sectors like research and development, information and technology services and logistics. The move is part of the government's plan to transform the economy from a manufacturing hub and encourage modern service sectors.
“The implementation of the VAT pilot programme means companies in the service sector are willing to invest in equipment and resources, upgrading their capability as they can offset the corresponding VAT” wrote Lawrence Hu, a partner specialising in tax at MWE Law Offices in Shanghai, in China Law & Practice's May cover story on this initiative.
Since China's economic boom the country has been perceived as a factory for the world. Modern services like consulting have yet to flourish in an economy that is still focused on industry. The pilot programme is designed to change that by reducing the ultimate tax burden for modern services.
A staff member of the SAT told the Global Times last week the programme will start on July 1, but officials have yet to confirm this date. It is thought the SAT is testing to see the response from affected companies before committing to a specific date.
Implementing a programme of this scale requires comprehensive training and awareness raising. The Beijing SAT will need to ensure that affected companies are fully aware of the new requirements. In the short-term, tax rates will increase, but companies need to consider the long-term effects as they can claim back VAT incurred on business purchases.
If Beijing follows Shanghai's programme, the tax rate for transportation jumps from 3% to 11% and for modern service industries, it rises from 5% to 6%. Previously, China used a double-taxation system of business tax, which disallowed companies to offset their purchases.
Media reports also suggest that other municipalities and provincial capitals like Tianjin, Chongqing, Xiamen and Shenzhen will implement the scheme, but there are no official announcements to clarify this. However, expansion of the programme reduces the window of opportunity for companies to save money through VAT returns.
For example, Hu advises companies to engage more service providers from Shanghai as companies using a provider under the programme will receive a VAT invoice upon payment, which is tax deductable for the company and ultimately reduces their tax payable for the year. Expansion of the programme decreases this window of opportunity for companies to save money, as VAT becomes a nationwide reality.
The Beijing SAT still has to release circulars explaining the programme. Until then, companies can only look to the Shanghai programme for guidance. Businesses in China will be watching closely to see what differences in VAT rates occur.
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