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Shanghai’s Value-Added Tax (VAT) Pilot Programme

At China’s State Council on October 26th 2011, it was announced that the city of Shanghai is implementing a pilot programme introducing VAT to certain industries and sectors at the beginning of 2012. The Ministry of Finance (MOF) and the State Administration of Taxation (SAT) issued circulars no. 110 and no. 111 outlining rules to replace *Business Tax (BT) with **VAT. Launched on January 1st 2012, it has not yet been explained how long it will last, but is likely to serve as a road map to the way reforms will be carried out across the rest of China. This is a step on the road to China applying VAT across goods and service sectors. Revenues from indirect taxes currently account for approximately 75% of China’s total revenue collection, so the system is likely to have a major effect on business and consumers. Shanghai authorities are in the process of contacting businesses and branches that fall within the scope of the pilot programme, mainly those in the transportation sector and ‘modern services industry’.

*Business Tax: Turnover tax which cascades throughout the supply chain. Applies to each transaction but is a tax on business. The rate ranges from 3-5%. Collected and administered by local tax bureaus. Applies to both import and export of services.

**VAT: Only applies to the price charged to the end customer. A tax collected by business effectively only taxes the final price paid by the consumer. Administered and collected by State tax bureaus. Generally does not tax the export of services by businesses.

Pilot industries that fall within the scope of inclusion:

  1. Transportation Service Industries: Road transportation services, water transportation services, air transportation services, and pipeline transportation services.
    • Applicable VAT rate at 11% (Prevailing BT rate at 3%)
  2. Modern Services Industries: Research, development and technical services, information technology services, cultural creative services, logistic auxiliary services, and certification and consulting services.
    • Applicable VAT rate at 6% (Prevailing BT rate at 5%)
  3. Tangible movable property leasing services
    • Applicable VAT rate at 17%

Scope of inclusion:

Location of supplier (pilot industry) Location of customer Subject to VAT or BT
Shanghai Shanghai VAT
Shanghai Out of Shanghai VAT
Outside of Shanghai but in China Shanghai BT
Outside of Shanghai but in China Outside of Shanghai but in China BT

There is a mandatory VAT inclusion for those in the selected industries with a turnover of CNY 5million.Taxpayers below this can be classified as small scale VAT payers and taxed at 3%. Also, WOFEs, regional offices, and shanghai branches of non-Shanghai based entities may also be included. It is important for businesses to prepare for transitioning from BT to VAT and to assess the VAT readiness of their current systems and processes and to identify key risk areas and costs to be able to implement strategies to manage these.


(Source: Shanghai British Chamber of Commerce)






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