China Plans to Replace Business Taxes With a New VAT

China is planning to replace business taxes with a revamped value-added tax that may expand three crucial sectors next month, according to a report Thursday from the state-run Economic Information Daily.

A revamped VAT in China will affect imports and exports.

The program is an extension of a pilot project in Shanghai.

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The Ministry of Finance laid out a reform plan involving real-estate, finance and consumer services that it expects to put into effect in July, the report said. Under the blueprint, an 11% tax will be levied on property and construction companies, while a 6% rate will be imposed on financial and consumer-service industries. China started a trial run of VAT reform in 2012, aiming to reduce double taxation on companies and reduce their overall tax burdens. If fully implemented in the entire country, the VAT reform could lower taxes as a whole by 900 billion CNY ($144 billion). The Ministry is under pressure to increase consumer spending and increase growth.

A VAT taxes the difference between the sale price charged to a customer, minus the cost of materials and other taxable inputs. It is collected at the point of sale, making it, theoretically, easier to collect than individual and corporate taxes.

The Ministry of Finance already recently slashed tariffs by 50% for 14 categories of products including cosmetics, shoes and diapers. The reduction in taxation was intended to get Chinese consumers to spend more and give them access to more international brands and products.

One industry that would not welcome the new structure is China’s financial sector. Scrapping the old VAT and replacing it with the new 11% and 6% rates of taxation would likely raise the net tax burden of Chinese financial firms. There is currently a 5% corporate tax on the sector. A new VAT would also affect firms in the US taking delivery of exported Chinese goods, such as steel. China removed export tax rebates on boron-containing steels to dissuade producers from simply shifting excess production onto export markets back in January, but removing the rebate didn’t really make much of a dent in Chinese exports. It’s still unclear how the new rates would affect exports.

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