China to Launch VAT Pilot Program

October 27, 2011 Taxation in China

VAT in ChinaSHANGHAI – China is set to aid enterprises in the national service sector with a new program to replace current turnover tax systems with a value added tax system.

On October 26th the State Council of China issued a statement revealing that it has approved a new pilot program to replace the national turnover tax with a simpler value added tax (VAT).

The new tax will be instated from January 1st 2012 for transportation and service firms operating in the Shanghai region. If the program is deemed to be a success, the government will incrementally expand the tax across other regions of the country when economic conditions allow.

Under current tax rules in China, firms operating in the service sector are levied a turnover tax on their annual sales revenues, while manufacturing firms across the country pay a VAT of up to 17 percent. Under the new tax trial, service sector firms will be subject to the same tax treatment as manufacturing firms. The State Council indicated that as the pilot program progresses, service sector firms will see their VAT rate lowered to between 6 percent and 11 percent.

According to local tax experts, the new trial is a concentrated effort by the government of China to ease the fiscal burdens on small firms operating in the country. Commenting on the program Wang Han, an analyst at Industrial Securities in Shanghai, said that the new system will be especially beneficial to companies undergoing financial trouble under the current credit crunch and tightening lending conditions.

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