China’s VAT Reform to be Expanded to Telecom Sector

March 12, 2014 Posted by China Briefing Reading Time: 3 minutes

SHANGHAI – China’s ongoing value-added tax (VAT) reforms will be expanded to the telecommunications sector, likely starting April 1^st, according to an announcement made by Premier Li Keqiang last week.

Initially limited to certain transportation and modern service industries in Shanghai, the VAT reform on services met with such success that it quickly spread to other regions of China, replacing the heavy-handed “business tax” (BT) as it went. Currently, the VAT reform has covered transportation, postal, broadcasting and other modern service sectors and has implemented VAT rates ranging from 0 percent to 17 percent depending on the specific service sector involved. For example, leasing of tangible movable property is taxed on a 17 percent VAT rate, while providing certification and consulting services are taxed at 6 percent.

Experts were quick to predict that these changes to the telecommunications sector would reduce profitability (estimates range from 7 to 25 percent) for the big 3 state-owned enterprises who currently monopolize China’s telecom sector: China Mobile Ltd., China Unicom (Hong Kong) Ltd., and China Telecom Corp. Given that the BT rate for telecom services currently stands at 3 percent, the industry will assuredly be taxed at a higher rate under the changes.

In response to the new VAT regime, carriers may be spurred to adopt new practices to avoid high taxation, such as offering free or discounted handsets when bundled with a service contract, according to KPMG last year.

These reforms come in the wake of trial measures begun in May of last year to begin allowing private companies to lease network capacity from their state-owned counterparts. Taken together, the two measures indicate a long-term strategy aimed at breaking up the SOE monopoly of telecom services in China, a move that is hoped will lead to a more competitive and efficient industry.

At present, however, it seems too early to tell how deeply the new telecommunications VAT reform will affect the world’s largest mobile phone market, with the VAT’s official rollout date and rate both left unstated in the announcement.

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