China to replace business tax with VAT in all sectors

China for the first time will replace business tax with value-added tax (VAT) in all sectors in a bid to streamline tax structures and reduce tax burden, Premier Li Kiqiang announced today.

“Business tax will be replaced with VAT in all sectors,” said Premier Li Keqiang in a government work report to the annual parliamentary session.

“Starting from May 1, the scope of work to pilot this measure will be extended to the construction, real estate, financial, consumer service industries, and VAT deductions will cover all new immovable property of enterprises to ensure that the tax burdens on all industries are reduced,” Li said in his address to the National People’s Congress, (NPC).

“This is a significant and positive development as China will have one of the most progressive VAT systems in the world,” said Lachlan Wolfers, KPMG China head of indirect taxes.

The change will unify the goods and services VAT system in China for the very first time.

China will be among the first countries in the world to apply VAT broadly to the financial services sector. That means that interest on loans made to businesses and consumers will be subject to VAT.

“To the best of our knowledge, there are only one or two relatively small economies in the world that have even tried this,” Wolfers was quoted as saying by the state-run Xinhua news agency.

The European Union has spent years studying whether VAT could be applied to financial services, and have not been able to implement it.

However, in applying VAT to financial services in China, it shows that it is possible. It would not be a surprise to see other countries follow suit if the Chinese do it successfully, the KPMG said.

“While there will inevitably be some short term challenges to businesses in getting ready for the transition to VAT, over time the adoption of a more modern system will benefit the economy as a whole,” Khoon Ming Ho, partner and head of tax at KPMG China said.

Tax evasion will be more difficult.

“The adoption of a unified VAT system in China should (over the long term) improve overall tax collections for the government, and tax evasion through undisclosed transactions will likely decrease,” Wolfers said.