Chinese Premier Li Keqiang on 5 March 2019 announced that the value added tax (VAT) rates of 16% and 10% that apply to the supply of certain goods and services would be reduced to 13% and 9%, respectively.
The reduced VAT rates are intended to provide relief to businesses and consumers; represent a step by the government to enhance economic activity in certain sectors; and reduce the overall tax burden.
The Chinese government has long used the VAT system as a tool in managing the economy, and today’s announcement is no exception. With this announcement, the government would have reduced the headline VAT rate by almost 25% over the past 12 months—initially from 17% to 16% (effective from 1 May 2018) and now from 16% to 13%. Once completed, China’s “headline” VAT rate would be below the OECD average rate of 19%.
Note that this VAT rate reduction likely represents a first step in a broader process of reforms of the Chinese VAT system. In particular, it is expected during 2019 and 2020 that the government will seek to reduce the number of VAT rates from three rates (6%, 9% and 13%) down to two rates. The government is also expected to upgrade the status of the VAT rules with respect to formal legislation and implementation rules. A remaining question is whether (and to what extent) the government uses the VAT legislative process as an opportunity for further reforms, including aligning China’s VAT system with OECD principles.
In addition to the rate reduction, there will also be preferential treatments available, such as an increase to the credits for manufacturers and lifestyle-related service providers, to reduce the tax burden for all taxpayers. Details are expected to be issued by policymakers shortly.
While at first glance this VAT rate reduction announcement may not seem challenging from a tax implementation perspective, there are many issues for businesses to consider.
Read a March 2019 report prepared by the KPMG member firm in China
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