A pilot scheme to replace the existing business tax on the country’s service sector with value added tax (VAT) has been declared by China’s Ministry of Finance and the State Administration of Taxation. The project will be in Shanghai starting from January 1, 2012.
The pilot scheme will be implemented on first on the VAT currently imposed on manufacturing companies and some other selected service industries, such as transport. The step will subsequently be extended nationwide if the pilot scheme succeeds. The step is a part of a plan to integrate all forms of China’s turnover taxes into VAT, over time.
It is expected that the tax burden on the service sector will be reduced by this move as business tax is calculated on a firm’s gross revenues, rather than only on added value. Another point which tends the government to take this scheme of VAT expansion is to avoid double taxation issues in the services sector. Because at present some products are subject to VAT after manufacture and then again business tax when sold.
Instead of the current normal VAT rates of 17% and 13%, the government will introduce two new VAT rates for the services sector, 11% and 6% in the pilot scheme. The transport industry will pay the higher 11% rate.
