BEIJING — Both companies and consumers in China will benefit from massive VAT cuts that will be implemented next month.
On March 21, the Ministry of Finance and two other government departments announced detailed measures to implement VAT reform to reduce the corporate tax burden.
Starting on April 1, companies that are subject to the 16 percent VAT rate on their taxable sales or imported goods will enjoy a 13 percent VAT rate, while those who are subject to the 10 percent VAT rate will only need to pay 9 percent, reads a ministry statement.
The cuts are a part of the total tax and fee cuts of “nearly 2 trillion yuan” (around $299 billion) to be made this year, according to the government work report delivered by Premier Li Keqiang to the annual national legislative session earlier this month.
“This year’s VAT rate adjustment is unprecedented,” said Gao Peiyong, vice-president of the Chinese Academy of Social Sciences.
As VAT is an indirect tax, the rippling effect of VAT reduction will be transmitted through the deduction mechanism layer upon layer, Gao said.
VAT is tax levied on the difference between the cost of production and the price of a commodity on the market. It contributed roughly 40 percent of the country’s tax revenue last year.
Regional experiments on VAT reform in China started in the beginning of 2012, and such reform was expanded throughout the country in May 2016. Last year, China cut the VAT rates for the 17 percent tier to 16 percent, and the 11 percent tier to 10 percent.
For Fujian-based SKSHU Paint Co, the 1-percentage-point drop last year resulted in a tax reduction of 9.45 million yuan, said the company’s chairman Hong Jie.
This year, the 3-percentage-point VAT cut will save more than 40 million yuan for the company, Hong said. “Lower VAT rate means ‘real money’ for enterprises.”
Guangxi Liugong Machinery Co will see total tax and fee reductions of 136 million yuan this year, among which 121 million yuan will come from VAT reduction.
Premier Li said on March 21 at a symposium the country should accelerate the implementation of tax cut measures to unleash the vitality of companies, keep the economy running within a reasonable range, and promote high-quality development.
“All industries will see their taxes go down, not up,” Premier Li said.
With companies enjoying lower tax rates, consumers will also receive the benefits as companies tend to share the gains from tax cuts.
Several automobile brands, including Mercedes Benz, BMW, and Volvo, have already responded with prices cuts, although the new tax VAT cuts have not taken effect.
China Railway Corporation also announced that it will lower freight rates to reduce railway logistics costs as the VAT rate in the transport industry will fall.
“The tax cuts will be effective only when market entities enjoy concrete benefits,” Premier Li said.