On 16 November, the Ministry of Finance and the State Administration of Taxation jointly issued a pilot scheme for levying value-added tax in lieu of business tax, and published the Commencement of the Pilot Scheme for Levying Value-added Tax in lieu of Business Tax in the Transport Industry and Certain Modern Service Industries in Shanghai Notice. Published together with the pilot scheme and the notice were other rules such as the Pilot Scheme for Levying Value-added Tax in lieu of Business Tax in the Transport Industry and Certain Modern Service Industries Implementing Measures, Issues Regarding the Pilot Scheme for Levying Value-added Tax in lieu of Business Tax in the Transport Industry and Certain Modern Service Industries Provisions and Transitional Policy on the Pilot Scheme for Levying Value-added Tax in lieu of Business Tax in the Transport Industry and Certain Modern Service Industries Provisions.
According to the Notice, a pilot scheme for levying VAT in place of business tax on the transport industry and certain modern service sectors was to be introduced in Shanghai from 1 January 2012. According to the other rules, the transport industry covers land, sea, air and pipeline transportation services as well as certain modern service sectors which comprise research and development and technical, information technology, cultural and creative, logistics, tangible movable property leasing and attestation consulting services.
Changes in taxation arrangements
Tax rate
Low tax rates of 11% and 6% will be introduced in place of the current 17% standard VAT rate and 13% low tax rate. The leasing of tangible movable property will continue to be subject to the tax rate of 17%; the transport and construction sectors will be subject to 11% rate; while the 6% rate will apply to other certain modern service sectors.
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Method of tax calculation
In principle, the general method for the calculation of VAT will be adopted for the transport, construction, postal and telecommunications, modern service, cultural and sports sectors as well as for the sale of immovable property and transfer of intangible property. The simple method for the calculation of VAT will, in principle, apply to the financial, insurance and consumer services sectors.
Basis of tax calculation
In principle, a taxpayer calculates tax payable based on the entire income derived from taxable transactions that have taken place. For certain industries involving an extremely large amount of payments or receipts on behalf of others or an extremely large amount of money advanced for others, a reasonable amount of these payments, receipts or advanced money is deductible.
Service, trade, import and export
VAT is imposed on services, trade and imports inside China, while a zero tax rate or tax exemption applies to exports.
Transitional arrangements
The pilot scheme has made substantial changes to the current turnover tax regime. To facilitate a smooth transition from the old tax regime to the new one, the pilot scheme has defined transitional arrangements in four major areas.
Attribution of tax revenues
To maintain the general stability of the existing financial system during the period of the pilot scheme, for business tax revenues attributable to the existing places where the pilot scheme is introduced, the revenues generated after VAT is levied in place of business tax will continue to be attributable to these places, but the taxes are to be submitted to the treasury separately. Reduced financial revenues as a result of the implementation of the pilot scheme will be borne by the central and local governments according to the current financial system.
Transition of preferential tax policies
Existing business tax incentives granted to the industries affected by the pilot scheme will continue. However, for industries where the double taxation issue can be resolved through reform, these incentives will be cancelled. During the period of the pilot scheme, an appropriate transitional policy will be applied to specific circumstances.
Coordination of tax items across regions
If a taxpayer under the pilot scheme pays VAT based on the place where its office is located, it may offset the business tax it pays in another place during the calculation of VAT. If a taxpayer not under the pilot scheme is engaged in business activities in a place under the pilot scheme, it can continue to declare and pay business tax pursuant to the relevant existing business tax regulations.
Convergence with VAT deduction policy
If an existing VAT taxpayer receives a VAT invoice for the purchase of a service from another taxpayer under the pilot scheme, input VAT can be deducted from the VAT invoice according to existing regulations.
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