VAT pilot program is improving–expanded scope and changes

By Yi Wang, ECOVIS Ruide China

On 13 December 2012, Ministry of Finance (MoF) and the State Administration of Taxation (SAT) jointly issued Circular on the Inclusion of the Railway Transport Industry and Postal Service Industry in the Pilot Collection of Value-added Tax in Lieu of Business Tax (Caishui [2013] No. 106, hereinafter “Circular 106”), replacing Circular on Tax Policies in the Nationwide Pilot Collection of Value Added Tax in Lieu of Business Tax in the Transportation Industry and Certain Modern Services Industries (Caishui [2013] No. 37, hereinafter “Circular 37”) which has been in effective for less than half a year. From 1 January 2014, the railway transportation industry and postal services industry will be included in the VAT pilot program. Meanwhile, some policies in the current VAT pilot program are also adjusted.

Railway transportation industry

For railway transportation industry, current business tax on whole sales at the rate of 3% will be changed to VAT on value added at the rate of 11%. Meanwhile, the old policy, that input VAT calculated with the amount of fees for the transportation indicated on the settlement voucher of transportation costs and the deduction rate of 7% where railway transport services are received, will be canceled. Therefore, until then, the whole transportation industry will be levied on VAT.

Postal service industry

China Post Group and its subsidiary post companies will be only levied on VAT for sales of philatelic items such as stamp album and other postal services. Current business tax on whole sales at the rate of 3% will be changed to VAT on value added at the rate of 11%.

Express delivery industry

The business of express delivery industry mainly includes delivery service, business process management service and transportation service, etc. Business process management service and transportation service have already been included in the VAT scope, while delivery service belongs to a new category of taxation in logistics supporting services according to Circular 106, whose tax rate is 6%.

International goods transportation agency service

Before the VAT pilot program, International goods transportation agency service was subject to business tax at the rate of 5%. The tax base was net of the revenue received and transportation expenses paid to other enterprises and individuals (“net basis”). When the VAT pilot program starts, it was subject to VAT at the rate of 6%, and the “net basis” method was continued applied. However, since 1 August 2013, according to Circular 37, the “net basis” method was canceled. The Class A forwarder can neither receive VAT deduction invoices, nor apply “net basis” method for its international freight charges. Therefore, the tax burden of the whole industry increased. (Please refer to ECOVIS INFO of May / June 2013.) Now the new Circular 106 will restore the “net basis” method, which may lead active effects for releasing burden and reducing logistic costs.
Circular 106 also introduces tax exemption policy for international goods transportation agency service. If the international transportation services charges are settled through financial institutions, and no special VAT invoices are issued for it, international goods transportation agency service can be free from VAT. This policy is applied retroactively from 1 August 2013.

Finance leasing industry

Before the VAT pilot program, when finance lessors and lessees using the “sale and lease back” method, lessors paid business tax only on the interest income they received. However, Circular 37 does not include the equipment cost in the deductible expenses, thus besides the interest income, the equipment cost are also subject to VAT. Now Circular 106 basically restores the original deduction method, while Customs duty and consumption tax during importation are not deductible any more. This policy is applied retroactively from 1 August 2013.
In addition, special VAT invoices may not be issued by the lessor to collect principal from the lessee, although issuing general invoices are allowed.

Other important issues

Circular 106 clarifies detailed taxable service scope of some pilot industries. For example, “technical test” and “technical training” belongs to the technical consulting services in R&D and technical services. Audit management, tax management, digging, management and use of internal data based on information system belong to business process management services in information and technology services. Design of web games belongs to design services in culture creativity services. Language translation belongs to consulting services in identification and consulting services.

Offshore outsourcing services are exempted from VAT. Circular 106 release the limitation of registration address. Then all tax payers dealing with offshore outsourcing services are able to enjoy the exemption policy. It also effectively extends the tax incentive to 31 December 2018.

Our observations and suggestions

With the inclusion of railway transportation industry and postal services industry in VAT pilot program, Circular 106 responses representations made by some industries since the release of Circular 37, and basically restore the net basis methods in international goods transportation agency service and finance leasing industry. We recommend the enterprises involved understand the changing policy on time and apply the tax incentives accordingly. We also ask other enterprises to pay attention to the further developments of VAT pilot program in the future.