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Summary

1. What is the Value-Added Tax (VAT) Pilot Program?

The VAT pilot program is a joint initiative between the Ministry of Finance (MoF) and the State Administration of Taxation (SAT) to replace Business Tax (BT) with VAT for select industries. The VAT pilot program launched in Shanghai on 1 January 2012 gradually rolled out in other major cities across China during 2012 and then expanded its implementation nationwide on 1 August 2013. The rules and regulations regarding the implementation of the VAT pilot program have changed since its inception, most recently with Circular Caishui [2013] 37 (“Circular 37”) being replaced by the Circular Caishui [2013] 106 (“Circular 106”).

2. What are the current VAT regulations?

As of 1 January 2014, the MoF and SAT introduced Circular 106 to expand the scope of the VAT pilot program to include the railway transportation and postal services industries; completing the VAT coverage for all forms of transportation services. The industries defined under the new scope that were required to pay BT at the rate of 3 percent are now subject to VAT at the rate of 6 percent or 11 percent. Circular 106 also specifies applicable VAT service types and extends VAT exemptions and preferential policies. The aim of the current VAT regulations is to reduce the overall tax burden of businesses and end-consumers by allowing VAT taxpayers to claim input VAT credits for the purchase of goods, fixed assets and services.

3. Which industry sectors are affected?

Building on the industries in the existing scope of the VAT pilot program , Circular 106 applies a VAT rate of 11 percent to railway transportation and postal service industries and a VAT rate of 6 percent to the receipt and distribution services of the courier industries. Circular 106 also implements changes to the VAT treatment of international goods transportation agency services and financial leasing industries.

In order to clarify the VAT categories, the following industries are identified as new sub-service types with a VAT rate of 6 percent, except for aerospace transportation services which has a VAT rate of 11 percent:

(1) technical forecasting and technical training services;
(2) engineering survey and exploration services provided after mining construction;
(3) auditing and tax management based on computer information technology;
(4) internal data analysis, internal data extraction, and internal data management based on computer information technology;
(5) receipt and distribution services;
(6) aviation training services;
(7) translation services.

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