Beijing is likely to be the second city in China after Shanghai to start levying value-added tax (VAT) on transport and certain modern service industries on September 1, the US auditor Ernst & Young (E&Y) said in Beijing Thursday, citing an insider who participated in the municipal policymaking.
The State Council said Wednesday that it would expand the pilot reform of replacing business tax with VAT at an additional 10 areas between August 1 and the end of the year, as part of the government’s efforts in structural tax reduction.
The 10 places include Beijing, Tianjin municipalities, Jiangsu, Zhejiang, Anhui, Fujian, Hubei and Guangdong provinces, as well as the cities of Xiamen and Shenzhen, the Xinhua News Agency reported Wednesday, citing a State Council decision.
E&Y predicted that because of a lack of infrastructure, only Beijing, Tianjin and Jiangsu and Anhui provinces would be able to complete such a reform by the end of the year, with Beijing being the first among the 10 places.
The local governments “would not initiate a pilot program if they’re not ready. There can easily be over 100,000 enterprises included in a (VAT) trial in Shanghai or Beijing. Without (deployment of) VAT-control invoice machines, these enterprises wouldn’t know what to do (with the trial),” said Liang Yinle, a partner at E&Y, who has advised the State Council on VAT reform.
Because of the complexity of VAT, Liang said in Shanghai’s case, the local government carried out massive training for the companies. Meanwhile, the VAT reform involves transferring taxation from local taxation bureaus to the local offices of the State Administration of Taxation, which needs time to coordinate, he said.
“Shanghai was the first city to try the VAT reform, where the business tax has been substituted by VAT with an 11-percent VAT rate on the transport sector and a 6-percent rate on the modern service industry,” Xinhua reported.
Liang noted that the VAT reform would not stoke up inflation as it currently focuses on the business-to-business sectors, and it could lower firms’ tax burdens in production because it avoids cascading effect of taxes, or tax on tax levy.
By the end of March, 129,000 companies in Shanghai had participated in the VAT reform, and the tax burden for the involved small firms was cut by about 40 percent, Shanghai-based eastday.com reported in May.
But the companies may get to pay more taxes on their increased profits, as VAT reduces the costs of production and eliminates the room for them to hide profits illegally, Liang said.