China will soon levy Value Added Tax (VAT) in all industry sectors


2016年03月15日

On March 7, 2016, the PRC Ministry of Finance and State Administration of Taxation (“SAT”) issued a notice, Caishui [2016] No. 32 (Notice 32), instructing various SAT branches and provincial local tax bureaus across the country to expand the trial application of VAT to the remaining industry sectors which are still subject to business tax (BT), a gross turnover tax currently co-existing with VAT.  Pursuant to Notice 32, effective from May 1, 2016, as a continuation of the BT-to-VAT reform, the SAT will begin to levy VAT on revenue generated by taxpayers from construction, real estate development, and banking services, as well as services relating to people’s daily life (e.g., catering, entertainment, etc.) (“Remaining Industry Sectors”).

According to the Commissioner of the SAT, as a result of the imposition of VAT across all industry sectors — covering the manufacture, distribution and retail sales of products, provision of services, and the transfer of intangible and tangible property (including real estate) — the government’s tax revenue will decrease approximately RMB500 billion in 2016.  However, this BT-to-VAT reform will provide the Chinese economy with a new and stronger impetus to sustain its current grow rate despite the economic challenges the country is facing.

VAT and BT are mutually exclusive.  In other words, VAT is not applicable if BT has already been levied on revenue generated from provision of certain services, e.g. construction.  BT is regressive, in that BT is imposed on each turnover, thereby resulting in multiple indirect taxation of business transactions.  Worst of all, the more parties are involved in a series of economic activities, the more BT burden there will  be on the entire chain of economic activities, thus discouraging collaboration among different players in the economic activities.  Moreover, as BT is included in the price for services, and not part of the VAT regime, BT paid by a taxpayer to its suppliers cannot be used to offset against VAT due in respect of the taxpayer’s output, i.e., revenue generated from sale of products or provision of services.

Although the upcoming imposition of VAT, instead of BT, on the Remaining Industry Sectors has been widely reported over the media, it remains to be seen how the detailed implementation of the BT-to-VAT roll out will look like in the Remaining Industry Sectors.  Lawyers at FuJae Partners will keep a close eye on this unfolding BT-to-VAT reform, so as to alert clients of any imminent changes and advise them on the implications for their business activities.


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