China: Introduction of VAT pilot program in China

To further solve the problems of collecting repeated taxes in the cargo and labor tax system, and to improve tax system and support development of modern service industry, the Chinese government introduced the VAT pilot program in the Twelfth FiveYear Plan. 

The VAT pilot program first came into force in Shanghai on Jan 1, 2012, with one-plus-six industries included, one referring to the transport sector including land, waterway, air and pipeline transport segments, whereas six representing the modern services sector covering the R&D services, IT services, cultural and innovation services, logistics auxiliary services, leasing of tangible movable assets, attestation and consulting services. The reform was expanded to another 11 regions, including Beijing, Tianjin and Shenzhen later. This is the first of the three steps of the program that will be implemented in stages. In this step, An 11% VAT rate applies to the transport sector, including land transport services, waterway transport services and air transport services; and a 6% VAT rate applies to related logistics supporting services, including aviation agent services, port services, freight & passenger station services, salvage services, freight forwarder services, customs declaration agent services, warehousing services and handling services. The new VAT regime brings turnovers previously subject to business tax into the charge of VAT which tax applies to other turnovers at the rates of 17% and 13%. 

The trial VAT reform is top rated in the tax system reforms of the Twelfth Five-Year Plan, and expressed as “expanding the scope of VAT and adjusting business tax accordingly.” After the tax sharing system was implemented in 1994, China pursued the turnover tax system which allowed the co-existence of VAT tax and business tax to protect the local governments’ fiscal interests. 

The VAT pilot program for the transport sector and some services sectors was rolled out across China on Aug 1 marking the beginning of the second stage of the three-step VAT pilot program. Since the nationwide expansion of the program on Aug 1, the modern services sector subject to the program was expanded to include the broadcasting, film and television services. Additional 740,000 taxpayers were included in the program, more than 90% of which are small taxpayers. Estimates show pilot businesses, new and old, will see taxes reduced by RMB 120 billion in 2013. 

According to the plan of The State Council, the reform will be completed during the Twelfth Five-Year Plan and the business tax will be replaced nationwide finally before the year of 2015. 

The VAT pilot program, a top priority in the implementation of China’s fiscal system reform, will benefit more industries and businesses to boost China’s economic transformation and growth.

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