China’s VAT pilot programme already covers a number of industries, including transportation, postal services and a number of other modern service sectors, but from June 1, the Finance Ministry announced the scheme will be expanded to the telecoms industry.
Under the former business tax (BT) system, which the new programme aims to replace, telecom companies were required to pay a rate of 3% on service revenues and surcharges.
Once the VAT reform takes effect, companies like China Mobile, China Unicom (Hong Kong) and China Telecom will pay two categories of VAT, dependent on the types of services they provide.
A basic VAT rate, set at 11% will be charged to companies that provide basic telecom services, such as utilising a fixed-line network, mobile network, satellite, and internet to provide voice services, as well as leasing or selling bandwidth.
A second VAT rate for value added telecom services, set at 6%, will apply to companies that provide services including: utilising fixed-line network, mobile network, satellite, internet, and cable TV network to render messaging services, provide electronic data transmission and application, and offer internet connections.
“To the extent that a Chinese telecom provider is a general VAT payer, it is allowed to utilise VAT input credits that are accumulated from its qualified purchases, that is the acquisition of fixed assets and equipment, to offset its output VAT liability on telecom revenues,” said Abe Zhao, head of international tax at KPMG.
“Therefore, compared with the current business tax regime, Chinese telecom providers will see their indirect tax rates increase from 3% to either 11% or 6% depending on their services, and meanwhile enjoy a new right of using input VAT to offset their output VAT obligations.”
“Whether their net indirect tax liabilities will increase or not depends on how much input credits are available to them after the new circular takes effect,” added Zhao.
The VAT trials could affect providers’ profits if they are unable to pass the increased costs onto the consumer.
Under the new rules, telecom providers must separate revenues and fees for sales of tangible goods, which will attract VAT at 17%. Therefore, companies looking to avoid high levels of taxation and increase sales figures may offer up free handsets, extra minutes or other discounts that are exempt from VAT to customers.
“From a pricing perspective, all the telecom prices are regulated, so it will be very difficult for the three providers to pass on the VAT costs to the customers, which is how VAT normally functions as a tax of the end consumer,” said Sarah Chin of Deloitte.
“However, once telecoms are taxed under the scope of VAT, the telecom companies will be able to recover the VAT paid on costs – which is not possible right now – and with the expenses of the telecoms equipment, this should alleviate the tax burden overall, so it is positive.”
“The three state owned enterprises (China Mobile, China Unicom and China Telecom) have all commented that the reform would negatively impact their revenues and profits in the short-term, but they also believe they would benefit from the reform in the long run,” added Chin.
Taxpayers within the telecoms industry, along with those that deal with such companies should review business contracts, as the transition to the new VAT system may affect the commercial pricing arrangements between the suppliers of telecoms services and their customers.
The old business tax rate of 3% will make way for two categories of VAT set at 11% or 6%. The increase in tax will naturally have an effect on the overall price of goods and services. Therefore, both parties will need to discuss whether prices be altered, and whether or not that price should include VAT.
Suppliers of telecoms services may wish to select retailers who can issue special VAT invoices to take advantage of the input credits made available under the new scheme.
