VAT Reform in Guangdong Province: A Transition to Value-Added Tax

October 9, 2012 Posted by China Briefing Reading Time: 4 minutes

Oct. 9 – Since its invention in France in 1954, value-added tax (VAT) has been implemented widely in more than 170 countries. China joined the wave in 1979 and set up the coexistence of business tax (BT) and VAT systems in its 1994 Tax Reform. However, this coexistence has caused confusion to business enterprises due to its duplicity, and China has begun to gradually replace BT on goods and services with VAT.

Shanghai successfully launched the VAT pilot program on January 1, 2012, followed by Beijing on September 1, 2012. Responding to the call from the government, Guangdong Province is set to launch its VAT pilot program on November 1, 2012.

Why VAT reform?

Guangdong Province, as the economic engine of South China, is having a hard time under the tough current economic climate and the country’s industrial restructuring. Enterprises in the province are now faced with profit pressure due to weak external demand and rising production costs. Therefore, tax reforms have been put forward in an effort to help assist companies facing this difficult situation. The VAT pilot program effectively reduces the tax burden on enterprises by resolving the issue of duplicate taxation brought by the current coexistence of BT and VAT systems.

Moreover, the service industry is of vital importance to the province’s economy; the added value of the industry totaled RMB2.07 trillion at the end of the 11th Five-Year Plan, accounting for 45 percent of the gross production value of the province, with the modern service industry taking up 54.8 percent of the overall service industry. However, as the service industry is currently subject to BT, enterprises thereof cannot enjoy any tax refund when exporting services, which largely weakens the international competitiveness of the industry and hinders its development. Guangdong is anticipated to break the bottleneck on developing the service industry and promote its development by launching the VAT pilot program.

Features of the VAT reform

Similar to Shanghai, the VAT pilot program in Guangdong adopts the ”1+6” model, covering the transportation sector (i.e. land transportation, water transportation and air transportation) and six modern service industries (i.e. R&D and technology service, information technology service, cultural and creative service, logistics auxiliary service, and authentication and consulting service).

Two new rates have been introduced into the VAT system – 11 percent and 6 percent. Those two rates are chosen based on the actual BT burden of pilot industries. The converted VAT rate of the transportation sector ranges from 11 percent to 15 percent, while such rates vary from 6 percent to 10 percent for the modern service industry.

To ensure the overall tax burden on the pilot industries will not increase after the implementation of the VAT reform, tax rates of 11 percent and 6 percent are selected to apply on the transportation sector and part of the modern service industries, respectively. Besides, a 3 percent VAT rate is applied to small-scale taxpayers with annual sales less than RMB5 million.

Impact of the VAT reform

The government estimates that around 190,000 enterprises will be covered under the VAT pilot program, including 18,000 small-scale enterprises, which are the biggest beneficiaries. The reform is expected to save RMB10 billion for local businesses and the revenue generated during the pilot period will be wholly disbursed by the local authorities.

Based on the pilot experience in Shanghai, small-scale taxpayers will see their tax burden drop while taxpayers in the transportation sector and tangle property leasing may experience an increase in their tax burden on a short-term basis. For enterprises concerned about their increased tax burden after the VAT reform, Guangdong has stated it will adhere to the general principle that “the overall tax burden on pilot industries shall not increase or shall be slightly lessened, and duplicate taxation shall be basically eliminated.”

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