China Completes the Process of Replacing Business Tax with VAT

As of May 1, 2016, China has fully replaced its business tax with a VAT.

The Chinese State Administration of Taxation first implemented value added tax (VAT) as of January 1, 2009, applying the new tax to goods and processing, repair and replacement services. Previously, these supplies had been subject to the business tax (BT). The Chinese government then issued a series of Circulars that expanded the scope of services subject to VAT, rather than BT, to sectors including transportation, research and development and telecommunications.

As of May 1, 2016, Circular 36 has further expanded the scope of VAT to the remaining sectors previously covered by the business tax, i.e.: 

  • Construction; 
  • Real estate; 
  • Financial services; and 
  • Lifestyle services.

A key difference between the Chinese VAT and business tax is that input tax deductions are permitted under the VAT system only.

As with other VAT systems worldwide, the Chinese VAT regime permits taxpayers to credit input tax against output tax, in accordance with the principle that VAT should be neutral for businesses. A zero percent rate applies to exports and international transportation services, as is generally the case.

The Chinese VAT system differs from other VAT systems in that it features four different standard rates, whereas most systems have a single standard rate. Examples of supplies taxed at each rate are provided below. 

  • The 17 percent rate applies to goods and processing, repair and replacement services;
  • The 13 percent rate applies to foodstuffs, utilities, books, newspapers, magazines and certain agricultural inputs;
  • The 11 percent rate applies to transportation services, postal services, basic telecommunications services, construction services, and immovable property leases and sales; and
  • The 6 percent rate applies to financial services, research and development, value-added telecommunications services, sales of intangible assets and “lifestyle services” such as hospitality, travel, education and healthcare.

Furthermore, unlike other regimes which exempt financial services, China subjects them to tax, subject to narrow exceptions, for example, in the case of certain inter-bank loans and insurance premium income from qualifying long-term personal insurance products.

Detailed information about the expanded Chinese VAT is provided in the BBNA VAT Navigator

The VAT Navigator is a customizable database of information about indirect tax, authored by leading practitioners from the 114 countries it features. The Chinese chapter is authored by Rainy Yao and Zhou Qian of Dezan Shira & Associates.

by Joanna Norland, Technical Tax Editor, Bloomberg BNA

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