Moody's Sees China's Expansion of VAT Trial as Credit Positive

by CFO Innovation Asia Staff, 31 July 2012

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Accounting and Regulations Tax

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China will expand a pilot value-added tax (VAT) program in Shanghai to ten other cities and provinces from August 1, which is credit-positive for the country, says Moody's Investors Service.

The pilot program in Shanghai replaces business tax levied on a company’s total revenue with a value-added tax that the business collects but is borne by the end-uses. It will now be extended to cover transportation and service businesses in Beijing, Tianjin, Shenzhen and Xiamen, as well as the provinces of Guangdong, Jiangsu, Zhejiang, Anhui, Fujian and Hubei. More areas will be added next year, according to a statement by the State Council, as China’s cabinet in known

In Shanghai, where the program has been it trial for seven months, transportation companies now pay an 11% VAT rate. Companies in some "modern service sectors,” such as information technology and consulting, pay 6%.

Manufacturers are reaping benefits as well. Under the program, they can claim credit against their own VAT liability on any VAT paid by their service providers, which could not be done previously when those providers were under a business tax system.

Moody’s believes the VAT could help boost private sector activity by removing duplicate taxation on goods and services.

Alan Wu, PricewaterhouseCoopers China national indirect tax leader, describes the expansion as a “welcome change” in a report.

“The current business-tax system is not business friendly,” he said. “It is squeezing businesses’ profit margins and increasing the cost of goods and services for consumers.”

The new tax system may reduce corporate taxes by 100 billion yuan a year if taken nationwide and boost GDP growth by half a percentage point, Xiao Jie, head of China’s State Administration of Taxation, said in a March article carried by Xinhua News Agency.

Shanghai reported a 13% decline in business-tax revenue in the first half of 2012 to 50 billion yuan, while VAT revenue rose 51% to 34 billion yuan, according to the city’s statistics bureau.

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