China pushes on with telecom VAT

Despite concerns last month about the feasibility of extending the Chinese VAT reforms to telecoms, the government has been confirmed this week that the sector will commence with the change over in June 2014. See Sate Administration of Taxation and Ministry of Finance Circular 43.

The two largest phone service providers, China Mobile and China Telecom, are expected to take big hits to their profits as they will struggle to pass on the implementation of the tax. Instead of the current Chinese Business Tax of 3%, the final consumer will be liable to 11% VAT on basic telephony and handset purchases. There will also be 6% on higher value added services including text and data. There will be some positives for the providers as they will now be able to offset incurred VAT on their expenses to reduce the bill.

Telecom services provided by foreign providers remain exempt.

The Chinese VAT reform was introduced as a pilot in 2012 in Shanghai. It was then extended to 12 cities through 2013, and then to the whole country in August 2013. So far, it is just a number of industries that have been included. Following telecoms, financial services and real estate are next with plans to complete the roll out before the end of 2015.

China sees the overall of the existing VAT (essential an irrecoverable sales tax) as vital to help balance its tax revenues away from job-creating industry. And also to eliminate the extensive compound taxation in internal industries.