China VAT pilot scheme

December 2011
China VAT pilot scheme

In 2012 China will start a VAT pilot scheme prior to introducing VAT nationally.
The pilot scheme is being run in Shanghai using a range of VAT rates including 0%, 6%, 11% and 17%.

Pilot set for January 2012 in Shanghai
Turnover tax reform in China will mean less tax income for government but is expected to promote development in China’s service sectors. To fully benefit from the merger of business tax (BT) and VAT, adjustments in the allocation of tax burdens in the supply chain may be necessary. In some cases, this may prompt changes in business models that suppliers have adopted for China.

Who needs to get ready
The pilot programme in Shanghai, set to take effect on 1 January 2012, will cover both domestic and foreign suppliers. Under the new law, suppliers in the following sectors will become VAT payers:

  • Road, water, air and pipeline transportation services
  • R&D and technology services
  • Information technology services
  • Design services
  • Intellectual property services
  • Advertising services
  • Meeting and exhibition services
  • Logistics
  • Leasing of movable property
  • Certification services

New VAT rates
Similar to VAT payers in the manufacturing and trading sectors, suppliers of services under the pilot programme will be divided into general VAT payers and small-scale VAT payers. The rate for small-scale VAT payers will be 3 percent. VAT rates for general VAT payers will be as follows:

Activity VAT rate
Leasing of movable property 17%
Transportation services 11%
Modern services (except leasing) 6%
Certain services* 0%
Export of services 0% or exempt

* to be determined by the Ministry of Finance and State Administration of Taxation

The details of the pilot programme were announced in Notice 110 and Notice 111 issued by China’s Ministry of Finance and the State Administration of Taxation on 16 November 2011.[1] Notice 110 lays out the general template for the pilot programme that will be implemented in China, and Notice 111 addresses the specific pilot programme that will commence in Shanghai on 1 January 2012.

VAT basics
General VAT payers can use input VAT to credit against output VAT. Conversely, small-scale VAT payers cannot offset input VAT against output VAT. A taxpayer with annual taxable service revenue of at least RMB5 million must apply to be certified as a general VAT payer.

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