Nationwide VAT reform for transport, services

The value added tax reform scheme that has been running in Shanghai and several other parts of the country over the last year will now expand nationwide in the transport and service sectors.

Under the plan, companies will pay taxes only on the value added to each stage of the production process and not on its gross revenues. That means a smaller tax bill for businesses.

In the past, companies paid taxes based on the total revenue they brought in, even though suppliers had also paid taxes on the money they had earned. That had many companies complaining about double taxation. Under the new rules, companies only pay based on the value they have added to a good, not the total sales price.

"Those customers also include important part of our economy system, which is manufacturing company. If we can get rid of this double taxation, we can also create benefits for manufacturing company. It can help to optimize our overall macro-economy system." Zhang Haoyu, Tax Researcher, Ernst & Young said.

Since the rules were put into place on a trial basis in 9 areas in January 2012, they have saved domestic companies 40 billion yuan a year in taxes. And with the rules expanding, they could save companies 120 billion yuan this year.

"But in the transportation industry, it seems a different story. Shipping companies are complaining about an increase in their tax rate, from a 3 percent sales tax in the past to an 11 percent value-added tax. And they plan to increase their prices, which will undermine the benefit other companies had hoped to get from the tax reform."

"Currently the system design has some element which is not favourable to the transportation companies. If I want to purchase some transportation services from overseas companies, whether or not this part, this payment, this purchase can allow to make any credit or deduction from my tax payment. So that's something I think the system need to be in the future, need to be improved." Zhang Haoyu said.

Zhou said the tax reform now only includes two major industries, transport and services, because they are the easiest to begin with. But the reform will expand to other fields in the future.