China’s SAT Details VAT Reform Issues in Shanghai

To resolve the issue of duplicate taxation on goods and services and support the development of the modern service industry, the Chinese government has commenced the value-added tax (VAT) reform aimed at gradually replacing business tax (BT) with VAT in China.  The pilot project will first take place in the transport and certain modern service sectors in Shanghai and gradually expand nationwide.

To detail the implementation of the pilot project, the State Administration of Taxation (SAT) and the Ministry of Finance (MoF) co-issued the “Circular on Printing and Issuing the Pilot Project Plan for Replacing Imposition of BT with VAT” (caishui [2011] No. 110) and “Circular on Commencing the Pilot Project of Replacing Imposition of BT with VAT in Shanghai Municipality’s Transport Industry and Several Modern Service Sectors” (caishui [2011] No.111) on November 16, 2011. According to the latter Circular, starting on January 1, 2012, the imposition of BT will be replaced with VAT in a number of services in Shanghai’s transport and modern service sectors.

Taxable services and VAT rates

The transport services and modern services that will be subject to VAT payment starting on January 1, 2012 in Shanghai are as follows:

For small-scale taxpayers whose input VAT cannot be deducted from output VAT, VAT shall be charged at the rate of 3 percent

Taxpayer status and treatment

• Taxpayers engaging in the taxable services under the pilot project with annual sales value exceeding RMB5 million should apply for VAT general taxpayer status.
• Taxpayers in pilot areas engaged in land or inland water transportation of cargoes
  and which are originally invoice issuing taxpayers should apply to be recognized as general taxpayers regardless of their annual sales value.
• Where taxpayers that do not fall under the pilot project engage in business activities in the pilot project area, they are required to continue paying business tax.
• Input VAT can be deducted based on the VAT invoices issued when purchasing services provided by taxpayers under the pilot project.
• General taxpayers that provide public transport services can calculate their VAT liability using the simplified tax computation method (i.e. no Input VAT can be deducted).
• General taxpayers providing pipeline transport services under the pilot project will enjoy refund on the portion of VAT exceeding 3% of their actual VAT burden. Partial or full exemption is also available under other circumstances.

Favorable VAT treatment

Services exempt from VAT payment include:

• Individual transfers of copyright;
• Taxable services provided by disabled individuals;
• Technology transfers, development, consulting and services provided by taxpayers engaging in the pilot taxable services;
• Taxable services included in the contracted energy management projects, provided by eligible energy-saving service companies;
• Taxable services provided by Shanghai-registered offshore outsourcing enterprises (the VAT exemption will be effective between January 1, 2012 and December 31, 2013).

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