National VAT Reform Proposals Submitted to State Council

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Sept. 3 – Proposals to restructure the national application of China’s most important collectable tax, the value-added tax, have been put forward to the State Council and are expected to be implemented shortly.

Two measures immediately stand out:

  1. VAT, which has not yet been levied on services, is to be attached to service contracts and invoices, meaning all service businesses in China can now both levy and offset VAT
  2. VAT has not yet been fully able to have been offset against certain purchases, such as equipment purchases; the proposals call for VAT to be offset against all transactions

The draft proposals broadly follow the VAT pilot scheme that has been adopted for testing by several northeast provinces over the past three years, as we originally reported in 2004.

The measures are expected to save businesses up to RMB150 billion annually and encourage more investment in industry. Businesses in China will now be able to offset VAT against fixed asset investments (such as equipment purchases), a mechanism previously denied them. The adjustments therefore have a huge impact on manufacturers in China. Although the proposals would see China lose taxable income in the short term, longer term revenues would increase as manufacturing capacity is expanded due to better investment on fixed assets, plants, and machinery encouraged by the new proposal.

The draft proposals have not yet been released in Chinese. We will post them in English as soon as they become available.

Businesses with questions as to how the draft proposals will affect and impact their business may email vat@dezshira.com for evaluation reports and advice.