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China to Replace Business Tax with Value Added Tax in All Sectors
At the opening ceremony of the National People’s Congress (NPC) held on 5 March 2016, Premier Li Keqiang announced that effective from 1 May 2016, Value Added Tax (“VAT”) will replace the current Business Tax (“BT”) in all sectors, including real estate & construction, financial services & insurance, lifestyle and other services (including hospitality, food & beverage, healthcare and entertainment).
This marks an era when BT will be replaced by VAT in all sectors and the consequent total tax savings for all businesses are expected to reach RMB900 billion (approximately 0.4% of GDP). However, this may impact different sectors to different extents.
The expected 11% VAT rate for thereal estate & construction sectors(compared with the current BT rate of 5% and 3% respectively) is expected to influence the property market’s pricing strategy and profitability of projects.
In contrast, the expected 6% VAT for thefinancial sectormay not result in a material tax burden increase. This is because financial institutions would be able to benefit from input VAT credits and unlikely need to pass on the tax costs to customers. The same can be said for the insurance sector.
With the VAT replacing BT, thefood and beverage (F&B) sectorwould no longer face a situation where organisations have to either pay a VAT or BT depending on whether their predominant business is the sale of takeaway products or a catering / restaurant service. However, businesses would instead be subject to a 17% VAT rate (for sale of food products) or a 6% VAT rate (for restaurant meals), which may have a significant tax cost impact on enterprises in the sector.
Although detailed implementation rules have yet to be released, companies in the respective sectors should start to prepare now for implementation of the expected VAT rates on 1 May 2016. They should also prepare for the potential financial impact of this change and the consequent pricing decisions.
We will share more insights when the VAT implementation rules are released