VAT treatment of supplies of services in pilot provinces in China: practices and issues

For many years, the Chinese taxation system relied heavily on indirect taxes, including value added tax, consumption tax and business tax. VAT is the major source of tax revenue for both the central government and local governments. VAT accounts for more than 30% of the total tax revenue raised by the central government in China. Modern VAT was introduced on January 1994 as one part of the reform of the tax-sharing system and is levied on the supply of goods and taxable services, namely processing, repairs and replacement services. Imports of goods are also subject to VAT. Unless otherwise indicated in the laws on VAT, the rate of VAT for any taxpayer who sells or import goods is 17%. VAT is collected by the national tax authorities at each stage of the production and distribution process. A credit invoice method is used to determine the taxable amount in relation to a VAT-registered taxpayer under the VAT system. Business tax serves as an important source of tax revenue for local governments. The business tax is payable by taxpayers who are engaged in the provision of taxable services, including transportation, financial services & insurance, construction, post & telecommunications, culture & sports, entertainment, and service and transfer of intangible assets & immovable property. The rate of business tax depends on the character of the taxable service provided by the taxpayer. With regard to transportation, construction, post & telecommunications and culture & sports, the tax rate is 3%, while for financial services and insurance, service and transfer of intangible assets & immovable property, the rate is 5%. Business tax is collected by the local tax authority. The taxable amount for business tax is the turnover, ie the total price and all other receivable charges for the supply of taxable services. No deduction of input tax is allowed.