China will reduce the number of different rates in its newly-rolled out value-added tax (VAT) scheme and look to iron out other shortcomings in a system that it said will reduce companies’ tax burden by 500 billion yuan ($72.62 billion) this year.
“We will further standardize and improve the VAT system in accordance with the requirements for the modern taxation system. We will simplify VAT rates appropriately,” the finance ministry said in an update last Friday. The ministry said having multiple VAT rates would “inevitably” result in the problem of different VAT rates being applied to similar business, impeding competition and hindering VAT from playing a neutral role.
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KPMG China’s head of indirect tax Lachlan Wolfers expects the government to work on reducing the number of rates from the current four (which range from 6 percent to 17 percent) next year, as most countries only have one or two, and speed up the switch to electronic invoices.
The VAT was applied to service sectors including finance and property on May 1 to complete the switch from a flat business tax. The change to a VAT tax, considered to be a more efficient way of taxing business, has gone relatively smoothly in China, despite an “exceptionally quick” transition period of five to six weeks before the May deadline, Lachlan said in Hong Kong.
The reduced tax burden hasn’t showed up as lower corporate tax receipts, which are up 9.4 percent for the year through October, but Lachlan says small businesses are seeing tax savings, while for bigger companies it may take longer for the benefits to show up. “A business has to pay VAT on their revenue, typically at a higher rate than they paid previously under the business tax, but when they replace major items of capital equipmentthey get the benefit of claiming a credit,” Lachlan says. “There is a timing issue (to seeing the benefits).”
Total taxes for the government can be going up because VAT helps crack down on fraud by requiring companies to provide invoices to receive tax credits, and has increased the number of companies paying taxes.