China: The expansion of the scope of pilot program of “VAT in Lieu of Business Tax“ in P.R.C

Background information, present situation and statistics of "VAT in lieu of business tax" 

“VAT in lieu of business tax” is an important step in the nation’s structural tax cut, which takes eliminating repeated taxation as the primary goal and achieving “no increase or a slight decrease“ in respect of taxation of businesses on the whole. Therefore, pilot program enterprises should not wishfully believe that ”VAT in lieu of business tax” is equal to tax reduction. Not long after Shanghai commenced the pilot program, Beijing's application for a pilot program has also been approved officially on 1 September 2012. In addition, more than 10 provinces and cities, including Shenzhen, Tianjin, Chongqing, Jiangsu and Zhejiang, have led applications for the pilot program of “VAT in lieu of business tax” one by one. For these enterprises, both opportunities and challenges co-existed in this “VAT in lieu of business tax”. 

Since 1 January 2012, Shanghai started to replace its business tax with value added tax, known as “VAT in lieu of business tax” below, 70% small scale tax payers of the 120 thousands of pilot enterprises have benefited from apparent drop of tax burden since the 5% business tax rate is replaced by a 3% VAT rate; whilst about 30% general enterprises tax payers have suffered heavier tax burden, especially transportation and other logistics enterprises, as their business tax rate of 5% is increased into a VAT rate of 11%, in addition this is due to lower income tax credit and limited pilot scope, and they are also unable to obtain VAT special invoices from upstream enterprises. For details, the pilot program in Shanghai includes ve major sectors such as transportation by land, water, air or pipe and modern services such as R&D and technology services, information technology services, cultural creativity services, logistics supplying services, tangible movables renting services, and certification and consulting services, covering 35 thousands general VAT tax payers and 85 thousands small VAT tax payers. 

1. Significant government policies against "VAT in lieu of business tax" 

In order to avoid repeated taxation, Shanghai enforces the Measures for Administration of Balance Levy of Business Tax in September 2010, which prescribe that when calculating taxable turnover, a business taxpayer may deduct tax allowable expenditures from all of its collected consideration and additional fees and charges and listed some 60 deductible items, classified into 8 main categories. To a certain degree, the balance levy reduces repeated levy of business tax before the implementation of “VAT in lieu of business tax” pilot program and has become a mainstream choice for those regions which have yet been subjected to the pilot program of "VAT in lieu of business tax". 

At the same time, in order to help pilot enterprises weather through the transition steadily and realizing the State’s target of “no increase or a slight decrease” in respect of taxation of businesses on the whole, Shanghai promulgated two policies about transitional financial supports ,such as Hu Cai Shui [2012] No. 5 and Hu Cai Shui [2012] No. 6. Those enterprises suering heavier tax burden shall make a rapid response without hesitation and apply for relevant financial support in accordance with the relevant documentation requirement. 

2. Conclusion and comment

"VAT in lieu of business tax" will benefit the enterprises' professional development, and it is an important tax reform of our country during the Twelfth Five-Year Plan and an important measure to optimize our nation’s tax structure. Current Shanghai pilot program and upcoming Beijing pilot program are at their initial phase of reform, i.e. such pilot program is carried out in chosen industries of selected areas. According to the reform plan, the second phase is to expand the pilot program from selective industries into all around the country; and the third phase is to realize “VAT in lieu of business tax” in its real meaning and "eliminate’" business tax in all industries all over the country during Twelfth Five-Year Plan.

In response to the “VAT in lieu of business tax”, enterprises should treat it as if it is a systematic project and needs more attention from the management and participation by all staff. Firstly, enterprises should carefully analyse the transformation impact and make plans; secondly, enterprises should also reset business processes in key reform elds; and thirdly, enterprises should do a good job in follow-ups and checks so as to prevent major risks. In addition, simultaneously, enterprises should pay close attention to Shanghai pilot program status, especially in four aspects such as handling of balance levy, application for financial supports, cleaning-up and collection of differential tax, and prevention of tax legal risks under the new tax policies, which are significant to the enterprises' interests, and execute well in various aspects so as to help the enterprises maximize benets and seize opportunities in challenges.